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    Lahore School of Economics Financial Management I Time Value of Money - 3 Assignment 4

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    Ahmed Zafar
    This document contains examples and problems related to the time value of money from Chapter 5 of the Financial Management I textbook. It includes 5 examples calculating present and future values with different interest rates and compounding periods. It also provides 6 practice problems calculating present values, interest rates, and effective annual rates given various compounding periods and time frames.

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    Lahore School of Economics Financial Management I Time Value of Money - 3 Assignment 4

    Uploaded by

    Ahmed Zafar
    33 views2 pages
    This document contains examples and problems related to the time value of money from Chapter 5 of the Financial Management I textbook. It includes 5 examples calculating present and future values with different interest rates and compounding periods. It also provides 6 practice problems calculating present values, interest rates, and effective annual rates given various compounding periods and time frames.

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    115_7613_264295

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    This document contains examples and problems related to the time value of money from Chapter 5 of the Financial Management I textbook. It includes 5 examples calculating present and future values with different interest rates and compounding periods. It also provides 6 practice problems calculating present values, interest rates, and effective annual rates given various compounding periods and time frames.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    33 views2 pages

    Lahore School of Economics Financial Management I Time Value of Money - 3 Assignment 4

    Uploaded by

    Ahmed Zafar
    This document contains examples and problems related to the time value of money from Chapter 5 of the Financial Management I textbook. It includes 5 examples calculating present and future values with different interest rates and compounding periods. It also provides 6 practice problems calculating present values, interest rates, and effective annual rates given various compounding periods and time frames.

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    © All Rights Reserved
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    Lahore School of Economics

    Financial Management I
    Chapter 5
    Time Value of Money - 3
    Assignment 4

    Examples

    1. What’s the present value of a perpetuity that pays $1,000 per year beginning one year from now if the
    appropriate interest rate is 5%? What would the value be if payments on the annuity began immediately?

    2. What is the rate of return present in an investment costing $5,000 today and paying $50 annually forever?

    3. Find the effective rate for the following situations:


    a) 10% nominal rate, semiannual compounding
    b) 6% APR, quarterly compounding
    c) 5% nominal rate, daily compounding

    4. Find the amount to which $500 will grow under each of these conditions:
    a) 12% compounded annually for 5 years
    b) 13% compounded semiannually for 5 years
    c) 14% compounded quarterly for 5 years
    d) 15% compounded monthly for 5 years
    e) 16% compounded daily for 5 years

    5. Find the present value of $500 due in the future under each of these conditions:
    a) 12% nominal rate, semiannual compounding, discounted back 5 years
    b) 11% nominal rate, quarterly compounding, discounted back 5 years
    c) 10% nominal rate, monthly compounding, discounted back 1 year

    6. As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly. To
    carry receivables, you must borrow funds from your bank at a nominal 6%, monthly compounding. To offset your
    overhead, you want to charge your customers an EAR (or EFF%) that is 2% more than the bank is charging you.
    What APR rate should you charge your customers?

    Problems for Assignment

    1. What is the PV of a British consol bond paying $250 in interest every year in perpetuity? Assume interest rate
    of 2.5%. What will the value be if payments on the annuity begin immediately?

    2. If you deposit $10,000 in a bank that pays 8% compounded quarterly, how much will be in your account after 6
    years?

    3. What is the present value of a security that will pay $5,000 in 10 years if securities of equal risk pay 6%
    monthly?

    4. Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily. Based
    on the EAR (or EFF%), which bank should you use?
    5. Credit card issuers must by law print their annual percentage rate on their monthly statements. A common APR
    is 18%, with interest paid monthly. What is the EFF% on such a loan?

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