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CHAPTER – 6 (Time Value of Money) Faculty: SFR

Question # 1
Sasha has a ten-year loan at 10.25% and the installment are $1,100 at the end of
each year for two years and $1,500 at the end of each year for the rest of the term of
the loan. What is the loan balance after three installments?
Answer: __7,244___

Loan = 1100 x PVA2,10.25 + 1500 x PVA8,10.25 x PV2,10.25 = 8427

Period Installment Interest Principle Loan Balance


0 8427 Loan
1 1100 864 236 8191
2 1100 840 260 7931
3 1500 813 687 7244

 if you want to use Financial Calculator to find the loan balance after three installments, you
can do that too ( In that case, you don’t need to show the table)

Question # 2
Robert was paid $3,663 at the end of each year for three years, starting end of year
2; and thereafter $2,442 at the end of each year for four years. Interest rate is
4.84%. If Raphael wants to accumulate $25,000 by the end of the 10th year, by how
much is Raphael over or under his goal?
Answer: $1850 Over

3663 X FVA 3,4.84% x FV 6,4.84 = 15309


2442 x FVA4,4.84 x FV2,4.84 = 11541
15309 + 11541 = 26850 compare to 25000
Therefore Over by $1850

Question #3
Sasha signed a bank loan and agreed to pay the installments as follows: ~ $8.880 at
the end of each year for seven years and $50,000 at the end of 15th year. If the
interest rate is 5.95 percent for the first seven year and 2 percent higher thereafter,
how much was the bank loan?
Answer: $67752

8880 (PVA7,5.95) + 50000 (PV8,7.95) (PV7,5.95) = 67752


Question #4

Progoti Insurance Inc. is offering you a life insurance policy with the following
quotations: You pay the insurance company $121 at the end of each month for five
years, starting now and they will pay you $231 at the end of each month for five
years, starting fifteen years from today. The interest rate for this policy is 4.80% per
annum. Calculate the present value of these cash flows and decide whether you
should buy this policy.
Answer: No, Loss is $447
You pay 121 x PVA60, 0.40 = 6443

You receive 231 x PVA60, 0.40 x PV180, 0.40 = 5996

Therefore Loss = 5996 - 6443 = $447

Note: When you convert the term(time) into months, you also convert the annual
interest rate to monthly aswell