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Time Value of Money

1. 1. Sam was injured in an accident, and the insurance company has offered him the choice
of $49,000 per year for 15 years, with the first payment being made today, or a lump sum.
If a fair return is 7.5%, how large must the lump sum be to leave him as well off
financially as with the annuity?
2. Your uncle has $1,135,000 and wants to retire. He expects to live for another 25 years
and to earn 7.5% on his invested funds. How much could he withdraw at the end of each
of the next 25 years and end up with zero in the account?
3. Your sister turned 35 today, and she is planning to save $20,000 per year for retirement,
with the first deposit to be made one year from today. She will invest in a unit trust fund
that is expected to provide a return of 7.5% per year. She plans to retire 30 years from
today, when she turns 65, and she expects to live for 25 years after retirement, to age 90.
Under these assumptions, how much can she spend each year after she retires? Her first
withdrawal will be made at the end of her first retirement year.
4. The house that the young couple bought for $450,000 is in a neighborhood where home
prices have risen 5% annually on average. They suspect that growth in home prices will
slow to an average of 3.5% per year over the next five years. If their growth estimate of
3.5% growth is correct, how much less will their house be worth in five years compared
with 5% growth?
5. A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond
currently sells for $900. If the yield to maturity remains at its current rate, what will the
price be 5 years from now?
6. You have just taken out an installment loan for $100,000. Assume that the loan will be
repaid in 12 equal monthly installments of $9,456 and that the first payment will be due 1
month from today. How much of your third monthly payment will go toward the
repayment of principal?
7. Your rich uncle has offered to put you through college. Your annual tuition payments will
begin one year from today, and there will be a total of four payments. Each payment is
RM25000. If your uncle can invest funds into an account paying 7 %interest compounded
annually, how much does he need today to cover the four payments? How much will be
in the account immediately after the first tuition payment? How much will be in the
account immediately after the last payment?
8. Miss Sadia borrowed RM 1500 at 14% annual rate of interest to be repaid over 3 years.
The loan is amortized into three equal annual end of year payment, calculate the end of
year loan payment and prepare loan amortization schedule.
9. A retirement home at Aslam Real Estate (Bhd) now cost RM 185,000. Inflation is
expected to cause this price to increase at 6 % per year over the 20 years before Miss
Sadia retires. How large an equal annual end of year deposit must be made each year into
an account paying an annual interest rate of 10% for Sadia to have the cash needed to
purchase a home at retirement?
10. . Proton Selesa is on heavy promotion now. The current on the road (OTR) price is
RM35,000 and zero down payment. Potential buyer needs to pay only RM700 per month
for 5 years and as incentive, the first monthly installment is waived, that is buyer will

need to pay for 59 months only, starting from end of next month. What is the effective
annual rate (EAR) of Proton Selesa offer? Show all workings.
11. Your child will be ready to go to college in 10 years, so you calculate that you will need
$20, 000 to cover educational expenses. If you start an installment plan at 4.5% annual
interest, how much should you deposit at the end of each month in order to achieve your
goal?
12. You borrow RM6000 from bank with interest rates of 12% per annum to be paid in 6
years. Compute the annual payment of the loan (paid at the end of each year). What is
your payment, principle payment, loan balance in year 5?
13. Miss Keya has RM1500 to invest. Her investment counselor suggests an investment that
pays no stated interest but will return RM 2000 at the end of 3 years. What annual rate of
return she can earn with this investment? If she got another offer that pays 8% annual
interest, which option she should choose? As a finance student, give your decision to
Keya.
14. Miss Bithi Akter wishes to find the effective annual rate associated with an 8% nominal
rate, when interest is compounded ,approximately
I.
Annually
II.
Semiannually
III.
Quarterly.
IV. Monthly.
V. Continuous

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