Mathematics of Finance Exercise and Solution

Introductory Mathematical Analysis, 14e (Haeussler et al.
)
Chapter 5 Mathematics of Finance
5.1 Compound Interest
Provide an appropriate response.
1) What is the effective rate that corresponds to a nominal rate of 20% compounded quarterly?
Answer: 21.5506%
Type: SA
Objective: (5) Compound Interest
2) How many years will it take for a principal to double at a rate of 10% compounded annually?
Give your answer to the nearest year.
Answer: 7
Type: SA
3) To what sum will $1000 accumulate if it is invested at 10% compounded annually for one year
and then at 10% compounded semiannually for two years?
Answer: $1337.06
Type: SA
4) An interest rate of 8% compounded semiannually corresponds to an effective rate of

A) 8%.
B) 8.1600%.
C) 8.2031%.
D) 9.2456%.
E) 12%.
Answer: B
Type: MC
5) A trust fund is to be established by a single payment so that at the end of 15 years, there will
be $20,000 in the fund. If the fund earns interest at the rate of 8% compounded semiannually,
how much should be deposited initially into the fund?
A) $6166.38
B) $6472.42
C) $7014.27
D) $7143.56
E) $11,105.30
Answer: A
Type: MC
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6) Find the effective rate that corresponds to an interest rate of 5% compounded daily.
Answer: 5.1267%
Type: SA
7) Over a period of 3 years, an original principal of $1000 accumulated to $1200 in an account

where the interest rate was compounded monthly. Determine the rate of interest to two decimal
places.
Answer: 6.09%
Type: SA
8) At what nominal rate of interest, compounded quarterly, will money double in 10 years?
Answer: 6.99%
Type: SA
9) If an initial investment of $4000 grows to $4884 in five years, find the nominal rate of
interest, compounded monthly, that was earned by the money.
Answer: 4%
Type: SA
10) If an initial investment of $4000 grows to $5718 in six years, find the nominal rate of
interest, compounded quarterly, that was earned by the money.
Answer: 6%
Type: SA
11) If an initial investment of $3000 grows to $18,000 in ten years, find the nominal rate of
interest, compounded monthly, that was earned by the money.
Answer: 18.052%
Type: SA
12) If an initial investment of $3000 grows to $18,000 in five years, find the nominal rate of
interest, compounded quarterly, that was earned by the money.
Answer: 37.49%
Type: SA
2
13) Suppose you leave an initial amount of $315 in a savings account for 10 years. If interest is
compounded monthly, use a graphing calculator to graph the compound amount S as a function
of the nominal rate of interest. Determine the nominal rate of interest so that there is $519 after
10 years.
Answer: 5%
Type: SA
14) At what nominal rate of interest, compounded monthly, will an investment double in 15
years?
Answer: 4.63%
Type: SA
15) At what nominal rate of interest, compounded quarterly, will an investment double in 15
years?
Answer: 4.65%
Type: SA
16) At what nominal rate of interest, compounded semiannually, will an investment double in 20
years?
Answer: 3.5%
Type: SA
17) At what nominal rate of interest, compounded monthly, will an investment triple in 20 years?
Answer: 5.51%
Type: SA
compounded daily (use 365 times per year), use a graphing calculator to graph the compound
amount S as a function of the nominal rate of interest. Determine the nominal rate of interest so
that the amount doubles after 20 years.
Answer: 3.47%
Type: SA
compounded monthly, use a graphing calculator to graph the compound amount S as a function
of the nominal rate of interest. Determine the nominal rate of interest so that the amount triples
after 30 years.
Answer: 3.67%
Type: SA
3
20) An initial investment of $2600 grows at an annual rate of 7.5% compounded monthly. Find
how long it takes for the investment to amount to $3500.
Answer: 4 years
Type: SA
5.2 Present Value
1) Determine the present value of $4000 due in 5 years if the interest rate is 10% compounded
semiannually.
Answer: $2455.65
Type: SA
Objective: (5) Present Value
2) A debt of $2000 due four years from now is to be repaid by a payment of $1000 now and a
second payment at the end of two years. How much should the second payment be if the interest
rate is 5% compounded annually?
Answer: $711.56
Type: SA
3) A person has the option of satisfying a debt by either paying $5000 now and $5000 in two
years, or by paying $3000 now, $3000 a year from now, and a final payment of x dollars two
years from now. Determine an equation of value that corresponds to the value of all payments at
the end of two years. It is not necessary to solve the equation. Assume that interest is at the rate
of 10% compounded semiannually.
Answer: 5000(1.0 + 5000 = 3000(1.0 + 3000(1.0 + x
Type: SA
4
4) For an initial investment of $10,000, suppose a company guarantees the following cash flows
at the end of the indicated years:
Year Cash Flow
1 $4000
3 $8000
Assume an interest rate of 5% compounded annually. (a) Determine the net present value of the
cash flows. (b) Is the investment profitable?
Answer: (a) $720.23 (b) yes
Type: SA
5) A debt of $2000 due in one year is to be repaid by a payment due two years from now and a
final payment of $1000 three years from now. If the interest is at the rate of 4% compounded
annually, then the payment due in two years is
A) $1000.00.
B) $1118.46.
C) $1155.43.
D) $1191.00.
E) $1203.14.
Answer: B
Type: MC
6) To purchase land for an industrial site, a company agrees to pay $20,000 down and $10,000 at
the end of every six-month period for 10 years. If the interest rate is 10% compounded
semiannually, what is the corresponding cash value of the land?
Answer: $144,622.10
Type: SA
7) Find the present value of $5000 due in 3 years if the interest rate is % compounded
monthly.
Answer: $4085.75
Type: SA
8) A bank pays 4% annual interest compounded quarterly. How large a deposit must be made
now in order that the account contains $1500 at the end of 3 years?
Answer: $1331.17
Type: SA
5
9) Find the present value of $3000 due after five years if the interest rate is 9.6% compounded
semiannually.
Answer: $1877.19
Type: SA
10) Find the present value of $300 due after six years if the interest rate is 5.4% compounded
monthly.
Answer: $217.13
Type: SA
11) How much must be invested at an interest rate of 7.25% compounded quarterly to have
$10,000 in two years?
Answer: $8661.46
Type: SA
12) How much must be invested at an interest rate of 9.6% compounded monthly to have $3000
in five years?
Answer: $1859.90
Type: SA
13) A trust fund for a child's education is being set up by a single payment so that at the end of
17 years there will be $31,000. If the fund earns interest at the rate of 8.25% compounded
monthly, how much money should be paid into the fund initially?
Answer: $7662.10
Type: SA
14) A trust fund for a 12-year-old child is being set up by a single payment so that when the child
is 21 there will be $24,000. If the fund earns interest at the rate of 7.25% compounded quarterly,
how much money should be paid into the fund initially?
Answer: $12,571.05
Type: SA
15) A trust fund for a newborn is being set up by a single payment so that at the end of 18 years
there will be $34,000. If the fund earns interest at the rate of 6.25% compounded monthly, how
much money should be paid into the fund initially?
Answer: $11,070.46
Type: SA
6
5.3 Interest Compounded Continuously
1) If $1000 is deposited into a savings account that earns interest at an annual rate of 6%
compounded continuously, find the value of the account at the end of seven years. Give your
answer to the nearest dollar.
Answer: $1522
Type: SA
Objective: (5) Interest Compounded Continuously
2) If $200 is deposited into a savings account that earns interest at an annual rate of 8%
compounded continuously, find the value of the account at the end of two years.
Answer: $234.70
Type: SA
3) Determine the effective rate equivalent to an annual rate of 8% compounded continuously.

Answer: 8.33%
Type: SA
4) Determine the effective rate equivalent to an annual rate of 10% compounded continuously.
Answer: 10.52%
Type: SA
5) At an annual rate of 4% compounded continuously, in how many years would it take for a
principal to double?
Answer: 17.3
Type: SA
6) At an annual rate of 8% compounded continuously, in how many years would it take for a
principal to double?
Answer: 8.7
Type: SA
7
7) In five years a company will purchase equipment costing $100,000. The company decides to
place a single deposit into a savings account now so that its future value will equal the cost of the
equipment. If the account earns interest at an annual rate of 10% compounded continuously,
determine the deposit to the nearest dollar.
Answer: $60,653
Type: SA
8) A trust fund is to be set up by a single payment so that at the end of 10 years there will be
$1,000,000 in the fund. If interest is compounded continuously at an annual rate of 9%, to the
nearest dollar, how much money should be paid into the fund initially?
Answer: $406,570
Type: SA
9) If an investment of $20,000 earns interest at an annual rate of 9% compounded continuously,

then the value (in dollars) of the investment six years from now is
A) 20,000(1.
B) 20,000(1.
C) 20,000
D) 20,000
E)
Answer: C
Type: MC
10) If an investment of $12,000 earns interest at an annual rate of 7% compounded continuously,

then the value (in dollars) of the investment ten years from now is
A) 12,000(1.
B) 12,000(1.
C)
D) 12,000
E)
Answer: D
Type: MC
8
5.4 Annuities
11) Suppose a person deposits $1000 in a savings account at the end of every six months. What
is the value of the account at the end of five years if interest is at a rate of 10% compounded
semiannually?
Answer: $12,577.89
Type: SA
Objective: (5) Annuities
12) To purchase land for an industrial site, a company agrees to pay $20,000 down and $10,000
at the end of every six-month period for 10 years. If the interest rate is 10% compounded
semiannually, what is the corresponding cash value of the land?
Answer: $144,622.10
Type: SA
13) A person establishes the following retirement plan: an immediate deposit of $10,000 and
quarterly payments of $1,500 at the end of each quarter into a savings account that earns 5%
compounded quarterly, what is the amount of the investment after 21 years?
Answer: The amount of the investment is $294,084.69 after 21 yrs.
Type: SA
14) Suppose an annuity due consists of 6 yearly payments of $200 and the interest rate is 5%
compounded annually. Determine (a) the present value and (b) the future value at the end of 6
years.
Answer: (a) $1065.90 (b) $1428.40
Type: SA
15) Suppose a corporation pays $50,000 for a machine that has a useful life of eight years and a
salvage value of $5000. A sinking fund is established to replace the machine at the end of 8
years. The replacement machine will cost $70,000. If equal payments are made into the fund at
the end of every 6 months and the fund earns interest at the rate of 10% compounded
semiannually, what should each payment be?
Answer: $2747.54
Type: SA
16) Suppose $500 is initially placed in a savings account that earns interest at the rate of 8%
compounded semiannually. Thereafter, $500 is deposited in the account at the end of every six
months for five years. The value of the account at the end of five years is
A) $4055.45.
B) $4555.45.
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C) $6003.05.
D) $6743.18.
E) $6799.78.
Answer: D
Type: MC
10
17) Suppose a person invests $20,000 in a business venture that guarantees the same cash flow at
the end of every quarter for four years. If the investment earns interest at the rate of 16%
compounded quarterly, then each cash flow is
A) $916.40.
B) $1527.52.
C) $1716.40.
D) $1917.39.
E) $2341.23.
Answer: C
Type: MC
18) Consider the following annuity: $2000 due at the end of each year for two years, and $3000
due thereafter at the end of each year for three years. At an interest rate of 4% compounded
annually, the present value of the annuity is
A) $12,487.24.
B) $11,469.37.
C) $10,541.31.
D) $10,211.37.
E) $9,583.28.
Answer: B
Type: MC
19) Suppose a company establishes a sinking fund to replace equipment that has a salvage value
of $50,000. The company deposits $20,000 into the fund at the end of every six months. If
interest is earned at the rate of 8% compounded semiannually, the value of the fund at the end of
six years is
A) $137,701.48.
B) $187,701.48.
C) $237,701.48.
D) $250,516.10.
E) $300,516.11.
Answer: E
Type: MC
20) Find the sum of the geometric series: 1 + + + +
Answer: 2.6049383
Type: SA

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1) A $5000 loan is to be repaid over three years by equal payments due at the end of every
quarter. If interest is at the rate of 20% compounded quarterly, determine (a) the quarterly
payment and (b) the total interest paid.
Answer: (a) $564.13 (b) $1769.56
Type: SA
Objective: (5) Amortization of Loans
2) A 20-year loan for $100,000 is to be amortized by equal semiannual payments. If interest is at

the nominal rate of 10% compounded semiannually, find (a) the semiannual payment; (b) the
interest in the first payment; (c) the principal repaid in the first payment.
Answer: (a) $5827.82 (b) $5000.00 (c) $827.82
Type: SA
3) A debt of $600 is to be repaid by two equal yearly payments with interest at the rate of 5%
compounded annually. Complete the following amortization schedule for this debt.
Totals ________ ________ ________ ________

Answer:
Totals 45.37 645.36 599.99

Type: SA
4) An $800 loan is amortized by equal quarterly payments over two years. If interest is at the rate
of 16% compounded quarterly, then the quarterly payment is
A) $86.82.
B) $104.16.
C) $118.82.
D) $124.36.
E) $132.14.
Answer: C
Type: MC
5) A $10,000 loan is amortized by equal semiannual payments over 5 years. If the interest rate is
8% compounded semiannually, then the principal repaid in the first payment is
A) $762.47.
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B) $795.38.
C) $806.21.
D) $832.91.
E) $853.64.
Answer: D
Type: MC
6) A person purchases a home for $130,000, makes a down payment of $30,000. Find the
monthly payment if the person takes a loan for 25 years with an interest rate of 8% compounded
monthly.
Answer: $771.82
Type: SA
7) A person purchases a home for $130,000, makes a down payment of $30,000. Find the
monthly payment if the person takes a loan for 15 years with an interest rate of 8% compounded
monthly.
Answer: $955.65
Type: SA
8) A person purchased a television set for $850 and agreed to pay it off by monthly payments of
$50. If the store charges an interest rate of 9% compounded monthly, how many months will it
take to pay off the debt?
Answer: 18.25 months, approximately
Type: SA
9) A person amortizes a loan of $180,000 for a new home by obtaining a 30-year mortgage at the
rate of 8.7% compounded monthly. Find (a) the monthly payment, (b) the total interest charges,
and (c) the principal remaining after 10 years.
Answer: (a) $1409.64 (b) $327,470.40 (c) $160,091.23
Type: SA
10) The Krishnans amortize a loan of $150,000 for a new home by obtaining a 40-year mortgage
at the rate of 10.2% compounded monthly. Find (a) the monthly payment, (b) the total interest
charges, and (c) the principal remaining after 15 years.
Answer: (a) $1297.32 (b) $472,713.60 (c) $140,579.48
Type: SA
5.6 Perpetuities
Find the present value of the given perpetuity.
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1) $50,000 per year at the rate of 10% yearly
A) $500,000
B) $55,000
C) $5,000
D) $5,000,000
Answer: A
Type: BI
Objective: (5) Perpetuities
Solve the problem.
2) The Finance Club would like to endow an annual prize of $150 to the student who shows the
most promise as a future stockbroker. The club is confident that it can invest indefinitely at an
interest rate of at least 5% a year. How much does the club need to endow its prize?
A) $3000
B) $158
C) $300
D) $3150
Answer: A
Type: BI
Objective: (5) Perpetuities
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Mathematics of Finance Exercise and Solution

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Mathematics of Finance Exercise and Solution

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Introductory Mathematical Analysis, 14e (Haeussler et al.

5.1 Compound Interest

Provide an appropriate response.

4) An interest rate of 8% compounded semiannually corresponds to an effective rate of

7) Over a period of 3 years, an original principal of $1000 accumulated to $1200 in an account

5.2 Present Value

Provide an appropriate response.

Provide an appropriate response.

3) Determine the effective rate equivalent to an annual rate of 8% compounded continuously.

9) If an investment of $20,000 earns interest at an annual rate of 9% compounded continuously,

10) If an investment of $12,000 earns interest at an annual rate of 7% compounded continuously,

Provide an appropriate response.

20) Find the sum of the geometric series: 1 + + + +

Provide an appropriate response.

2) A 20-year loan for $100,000 is to be amortized by equal semiannual payments. If interest is at

Totals

Totals 45.37 645.36 599.99

Find the present value of the given perpetuity.

Solve the problem.

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