TUTORIAL QUESTIONS (TIME VALUE OF MONEY)

QUESTION 1
If you have a choice to earn simple interest on RM10,000 for three years at 8% or compound interest
at 7.5% for three years, which one will pay more and by how much?

QUESTION 2
If you wish to accumulate RM140,000 in 13 years, how much must you deposit today in an account
that pays an annual interest rate of 14%?

QUESTION 3
At what annual interest rate must RM124,925 be invested so that it will grow to be RM475,000 in 14
years?

QUESTION 4
How many years will it take for RM29,916 to grow to be RM554,000 if it is invested in an account
with a quoted annual interest rate of 12% with semi-annual compounding of interest?

QUESTION 5
Amelia has an opportunity to receive RM300 one year from now. If he can earn 6% on his
investments in the normal course of events, what is the most he should pay now for this opportunity?

QUESTION 6
You have a chance to buy an annuity that pays RM1,000 at the end of each year for 5 years. You could
earn 6% on your money in other investments with equal risk. What is the most you should pay for the
annuity?

QUESTION 7
Whats the present value of a perpetuity that pays RM100 per year if the appropriate interest rate is
6%?

QUESTION 8
Whats the rate of return you would earn if you paid RM1,500 for a perpetuity that pays RM105 per
year?
1

QUESTION 9
You plan to buy a second-hand car that has a total "drive-out" cost of RM25,700. You will make a
down payment of RM3,598. The remainder of the cars cost will be financed over a period of 5 years.
You will repay the loan by making equal monthly payments. Your quoted annual interest rate is 8%
with monthly compounding of interest. (The first payment will be due one month after the purchase
date.) What will your monthly payment be?

QUESTION 10
When Aisya was born, her parents invested RM7,000 in a savings account paying 8% interest. Each
year, starting with her first birthday and ending on her eighteenth birthday, her mother plan to deposit
RM1,000 into the same account. How much will be in the savings account on Aisyas 18th birthday
(after the last deposit)?

QUESTION 11
At a rate of 8%, what is the present value of the following cash flow stream? RM0 at Time 0; RM100
at the end of Year 1; RM300 at the end of Year 2; RM0 at the end of Year 3; and RM500 at the end of
Year 4?

QUESTION 12
You plan to retire 33 years from now. You expect that you will live 27 years after retiring. You want to
have enough money upon reaching retirement age to withdraw RM180,000 from the account at the
beginning of each year you expect to live, and yet still have RM2,500,000 left in the account at the
time of your expected death (60 years from now). You plan to accumulate the retirement fund by
making equal annual deposits at the end of each year for the next 33 years. You expect that you will
be able to earn 12% per year on your deposits. However, you only expect to earn 6% per year on your
investment after you retire since you will choose to place the money in less risky investments. What
equal annual deposits must you make each year to reach your retirement goal?
QUESTION 13
You plan to invest RM2000 a year in one of the Malaysian unit trusts for the next 20 years. You would
like to know the effect of investing this money at the beginning of each year rather than waiting until
the end of each year. Calculate the difference in the future value of your investment at the end of 20
years as an ordinary annuity versus an annuity due, assuming a 10 percent interest rate.

QUESTION 14
Joe borrowed RM15,000 at 14 percent annual rate of interest to be repaid over three years. The loan is
amortized into three equal annual end-of-year payments.
a.
b.
c.

Calculate the annual end-of-year loan payment.

Prepare a loan amortization schedule, showing the interest and principal breakdown of
each of the three loan payments.
Explain why the interest portion of each payment declines with the passage of time.

YOUTUBE:
THE PROHIBITION OF RIBA (interest)
Lecture by Sheikh Imran Hosein

https://www.youtube.com/watc
h?v=_iyVR-apZJk