Exercises

1. Julie Miller wants to know how large her deposit of $10,000 today will become at a compound
annual interest rate of 10% for 5 years.
2. Julie Miller wants to know how large of a deposit to make so that the money will grow to $10,000
in 5 years at a discount rate of 10%.
3. Basket Wonders (BW) has a $1,000 at the bank. The interest rate is 6% compounded quarterly for
1 year. What is the Effective Annual Interest Rate (EAR)?
4. Happy Harry has just bought a scratch lottery ticket and won 10,000. He wants to finance the
future study of his newly born daughter and invests this money in a fund with a maturity of 18
years offering a promising yearly return of 6%. What is the amount available on the 18th birthday
of his daughter?
5. Rudy will retire in 20 years. This year he wants to fund an amount of 15,000 to become available
in 20 years. How much does he have to deposit into a pension plan earning 7% annually?
6. The National Savings Fund promises a monthly 0.75% return if you deposit 100 per month for 15
consecutive years. What amount will be accumulated after those 15 years?
7. Willy has just bought a house. She estimates that the roof will have to be renewed at a cost of
25,000 after 20 years. To cover these costs, she intends to save an equal amount of money at the
end of each year, earning 6% annual interest rate. How much is such a yearly annuity?
8. What is the balance in an account ta the end of 10 years if $2,500 is deposited today and the
account earns 4% interest compounded annually? Quarterly?
9. If you deposit $10 in an account that pays 5% interest, compounded annually, how much will you
have at the end of 10 years? 50 years? 100 years?
10. How much interest on interest is earned in an account by the end of 5 years if $100,000 is
deposited and interest is 4% per year, compounded continuously?
11. How much will be in an account at the end of five years the amount deposited today is $10,000
and interest is 8% per year, compounded semi-annually?
12. Suppose you want to have $0.5 million saved by the time you reach ago 30 and suppose that you
are 20 years old today. If you can earn 5% on you funds, how much would you have to invest
today to reach your goal?
13. How much would I have to deposit in an account today that pays 12% interest, compounded
quarterly, so that I have a balance of $20,000 in the account at the end of 10 years?
14. Suppose I want to be able to withdraw $5,000 at the end of five years and withdraw $6,000 at the
end of six years, leaving a zero balance in the account after the last withdrawal. If I can earn 5% on
my balances, how much I deposit today to satisfy my withdrawals needs?

15. Consider a loan of $1 million that is paid off quarterly over a period of nine years. calculate the
dollar amount of interest and loan principle repaid corresponding to each payment if the interest
rate is 6% per year, compounded quarterly.
16. Suppose you deposit $100,000 in an account today that pays 6% interest, compounded annually.
How long does it take before the balance in your account is $500,000?
17. The Lucky Loan Company will lend you $10,000 today with terms that require you to pay off the
loan in thirty-six monthly installments of $500 each. What is the effective annual rate of interest
that the Lucky Loan Company is charging you?
18. How long does it take for your money to grow to ten times its original value if the interest rate of
5% per year?
19. Under what conditions does the effective annual rate of interest (EAR) differ the annual percentage
(APR)?
20. As the frequency of compounding increases within the annual period, what happens to the relation
between the EAR and the APR?
21. If interest is paid at a rate of 5% per year, compounded quarterly, what is the: annual percentage
rate? Effective annual rate?
22. L. Shark is willing to lend you $10,000 for three months. At the end of six months, L. Shark
requires you to repay the $10,000, plus 50%.
a. What is the length of compounding period?
b. What is the rate of interest per compounding period?
c. What is the annual percentage rate associated with L. Sharks lending activities?
d. What is the effective annual rate of interest associated with L. Sharks lending activities?
23. The Consistent Savings and Loan is designing a new account that pays interest quarterly. They
wish to pay, effectively, 16% per year on this account. Consistent desires to advertise the annual
percentage rate on this new account, instead of the effective rate, since its competitors state their
interest on an annualized basis. What is the APR that corresponds to an effective rate of 16% for
this new account?
24. Consider an annuity consisting of three cash flows of $2,000 each. Assume a 4% interest rate.
What is the present of the annuity if the first cash flow occurs:
a. Today
b. One year from today
c. Two years from today
25. Suppose you wish to retire forty years from today. You determine that you need $50,000 per year
once you retire, with the first retirement funds withdrawn one year from the day you retire. You
will need funds up to and including your 25th birthday after retirement.
a. How much must you deposit in an account today so that you have enough funds retirement?

b. How much must you deposit each year in an account, starting one year from today, so that you
have funds for retirement?
26. You are attempting to save for a trip to Thailand to celebrate your graduation (in two years time)
from the MBA Programme in which you are currently enrolled in. You estimate that you will need
Rs.600, 000 to provide you with a 10-day trip to Thailand with your family when you graduate in
24 months. You currently have Rs. 300,000 in savings that you can put toward the trip. You are
planning to save this amount (Rs. 300,000) in 3-month fixed deposit scheme with the hope of
renewing it (with the interest) at the end of every 3 month during the 24 month period. According
to the current rates in the market, 3-months fixed deposits are entitled to receive 20%annual rate of
interest. In order to find the balance money, you will be depositing in a special savings account an
equal quarterly installment of money at the beginning of every quarter in your bank starting from
today. According to the condition set for this special saving account, interest will be compounded
to your account at the end of every quarter at a quarterly rate of 5%. However, you are not allowed
to withdraw any money from your account till the end of 24 months.
a. How much will your investment in fixed deposit be worth at the end of 24 month?
b. How much will you need to deposit in your special savings accounts at the beginning of each
quarter to have the balance money for the trip?
c. What is the difference of deposit money (installment) estimated in (ii) above, if you are
supposed to deposit at the end of each quarter instead of at the beginning of the quarter?
27. Using the Effective Annual Interest Rate as a basis for comparison, which one of the following
investments would offer the highest effective rate of return?
a. The credit union is offering a monthly compounded rate of 0.96%.
b. The local bank is offering compounded rate of 2.98%.
c. A finance company is promising an annual return on its products of 12.15%.
28. TeakGrow Ltd. Spend Rs. 4 million to clear a tract of land to set out some young teak trees. The
trees will mature in 10 years, at which time TeakGrow Ltd plans to sell the forest at an expected
price of Rs.24 million. What is TeakGrow Ltds expected rate of return?
29. Assume that your retirement date is tomorrow. At the end of every year, you want to deposit Rs.
600,000to your saving account for your following year expenses, for another 20 years. Your bank
agrees to do that under a very special scheme developed for elderly people. Under this, bank will
credit 20% interest to your account at the end of every year. How much money do you have to
deposit under this scheme now so that the bank could deposit Rs.600, 000 at the end of every year
to your savings accounts.

30. You are planning to buy your dream car in five years time. Its currents cost is Rs.7, 000,000. You
think that the price of the car would go up at an annual rate of 10%. If plane to deposit an
equivalent amount at the end of every quarter at an annual percentage rate of 12%, how much you
have to deposit at the end of every quarter in order to have the required sum at the end of 5 years?