$3000 is invested for a period of 3 years at a rate of 6%, compounded 2 times per year.

What will be the

balance in the account at the end of the investment period?

A certain number of dollars are invested for a period of 4 years at a rate of 5% compounded monthly. At the
end of the investment period there is a balance of $2442. How much money was invested?

$5000 is invested for a period of some years at a rate of 7%, compounded monthly. At the end of the
investment period, the balance is $6165. What was the term of the investment?

Smith invests $3000 for one year at a rate of 6%. How much interest will he earn at the end of that year?

Cortez invests $2500 at a rate of . What will her balance be at the end of three years?

Myles deposited $5000 for 4 years at a rate of . What will his balance be at the end of that time?

Reese deposited $7500 for two years into a money market account. At the end of two years she had a total of
$8700. What rate of interest did she receive?

A certain amount of money was invested for one year at a rate of . At the end of that year it had earned
$675. How much money was invested?
Future and Present Value Exercises

Problem #1
The Kaisers have accumulated a portfolio currently valued at $875,000. They believe that they
can earn an after-tax annual return of 8% on these funds. They would like to retire in 15 years.

1 P/YR
875000 +/- PV
A. What will be the estimated value of their portfolio at the time of their 15 N
retirement? 8 I/YR
Solve for FV

$2,775,647.97

1 P/YR
875000 +/- PV
B. What would the estimated value of their portfolio be if 20 N
they deferred retirement for 5 more years? 8 I/YR
Solve for FV

$4,078,337.50

Problem #2
Mrs. Hayes places $2,500 in a certificate of deposit that pays 9% interest and matures after 10
years.

1 P/YR
2500 +/- PV
10 N
A. How much interest will she earn if the interest is compounded 9 I/YR
annually? Solve for FV
- 2500 =

$3,418.41

1 P/YR
875000 +/- PV
B. How much interest will she earn if the interest is 20 N
compounded monthly? 8 I/YR
Solve for FV

$3,628.39

Problem #3
William has a savings account that pays 5% compounded annually. The account has a current
balance of $5,750. At this rate of interest, how many years will it take the account to grow to
$12,000? (Round to the nearest whole number.)

1 P/YR
5750 +/- PV
Example: Jack and Jane would like to save $10,000 for a 12000 FV
down payment on a boat they would like to buy in 3 years. 5 I/YR
They think they can earn 14% on their savings. How much Solve for N
will they need to save at the end of each year?
15 (Rounded to the nearest whole
number.)

Problem Summary
There is a short-cut method to estimate how long it takes for the value of money to double. This
is known as "The Rule of 72." Divide 72 by the interest rate. The answer is the approximate
number of years it will take.

Problem #4
Howard Brown buys a bond that will return $5,000 per year for the next 10 years.

END mode
1 P/YR
5000 +/- PMT
A. Using a discount rate of 12%, what is the present value of this 10 N
investment? 12 I/YR
Solve for PV

$28,251.12

B. If the current price of the bond is $30,000, should

No
Howard buy it?

Problem Summary
Howard should not buy the bond, because the current or present value of the investment is
$28,251.12, less than its $30,000 price.

Problem #5
1 P/YR
Mark must choose between receiving $50,000 five years 50000 FV
from now or taking a lump-sum payment of $30,000 5N
today. He assumes he can earn 10% compounded annually 10 I/YR
if he invests the $30,000. What is the present value of the Solve for PV
$50,000 future payment?
$31,046.07
Problem Summary
Mark should take the $50,000 to be received five years from today since its present value is more
than the $30,000 lump-sum payment.

Problem #6
You are offered $1,000 four years from now or $800 in cash today.

1 P/YR
1000 FV
A. What is the present value of the $1,000 if you assume an interest 4N
rate of 5%? 5 I/YR
Solve for PV

$822.70

At a 5% return, take
the $1,000 since its
B. Knowing the answer to Problem 6A, which of the present value is
two offers should you accept: $1,000 in four years or $822.70, more than
$800 in cash today? the $800 in cash
today.

$1,000 in four years

1 P/YR
1000 FV
C. What is the present value of the $1,000 if you 4N
assume an interest rate of 8%? 8 I/YR
Solve for PV

$735.03

At an 8% return, take
D. If you can earn 8% on alternative investments, which the $800 since the
of these two offers should you accept: $1,000 in four present value of the
years or $800 in cash today? $1,000 is now $735.03.

$800 in cash today

Problem Summary
This problem illustrates the point that at higher rates of return, one should elect to receive money
sooner.
An annuity is a series of payments required to be made or received over time at regular intervals.

The most common payment intervals are yearly (once a year), semi-annually (twice a year), quarterly (four
times a year), and monthly (once a month).

Some examples of annuities: Mortgages, Car payments, Rent, Pension fund payments, Insurance premiums.

TYPES OF ANNUITIES

Ordinary Annuity:
An Ordinary Annuity has the following characteristics:

The payments are always made at the end of each interval

The interest rate compounds at the same interval as the payment interval

For calculating the sum of a series of regular payments the following formula should be used:

R[(1+i)^ n -1]
S n =
i

Example: Alan decides to set aside $50 at the end of each month for his childs college education. If the child
were to be born today, how much will be available for its college education when s/he turns 19 years old?
Assume an interest rate of 5% compounded monthly.

Solution:
First, we assign all the terms:

R= $50
i= 0.05/12 or 0.004166
n= 18 x 12, or 216

Now substituting into our formula, we have:

R[(1+i)^n-1]
S n = -
i

$50[(1+0.05/12)^216 -1]
S n =
0.05 / 12

S n = $50(349.2020206)

S n = $17,460.10
Formula for calculating present value of a simple annuity:

R[1-(1+i)^-n]
A n =
i

Example: Alan asks you to help him determine the appropriate price to pay for an annuity offering a
retirement income of $1,000 a month for 10 years. Assume the interest rate is 6% compounded monthly.

Solution:
Substituting into our formula, we have:

R = $1,000
i = 0.06 /12 or 0.005
n = 12 x 10, or 120

$1,000[1-(1+0.005)^-120]
A n =
0.005

A n = $90,073.45

Annuity Due:
In an annuity due, the payments occur at the beginning of the payment period.

For calculating the sum of a series of regular payments the following formula should be used:

R(1+i)[(1+i)^ n -1]
S n (due)=
i

Example: Alan wants to deposit $300 into a fund at the beginning of each month. If he can earn 10%
compounded interest monthly, how much amount will be there in the fund at the end of 6 years?

Solution:

R = $300
i = 0.10/12 or 0.008333
n = 12 x 6 or 72

Substituting into our formula yields:

$300(1+0.10/12)[(1+0.10/12)^72-1]
S n (due) = -
0.10/12

S n (due) = $300(98.93)
S n (due) = $29,679
Formula for calculating present value of an annuity due:

R(1+i)[1-(1+i)^-n]
A n(due) = -
i

Example: The monthly rent on an apartment is $950 per month payable at the beginning of each month. If the
current interest is 12% compounded monthly, what single payment 12 months in advance would be equal to a
years rent?

Solution:
R= $950
i= 0.12/12 or 0.01
n= 12

Substituting into the formula gives:

$950(1+0.03)[1-(1+0.01)^-12]
A n(due) = -
0.01

A n(due) = $950(11.37)

A n(due) = $10,801.50
1. A 5-year ordinary annuity has a present value of $1,000. If the interest rate is 8 percent, the
amount of each annuity payment is closest to which of the following?
A. $250.44
B. $231.91
C. $181.62
D. $184.08
E. $170.44
Answ er to question #1

2. An 8-year annuity due has a present value of $1,000. If the interest rate is 5 percent, the
amount of each annuity payment is closest to which of the following?
A. $154.73
B. $147.36
C. $109.39
D. $104.72
E. $ 99.74

3. A 5-year ordinary annuity has a future value of $1,000. If the interest rate is 8 percent, the
amount of each annuity payment is closest to which of the following?
A. $250.44
B. $231.91
C. $184.08
D. $181.62
E. $170.44

4. An 8-year annuity due has a future value of $1,000. If the interest rate is 5 percent, the
amount of each annuity payment is closest to which of the following?
A. $104.72
B. $109.39
C. $147.36
D. $154.73
E. $ 99.74

5. Which of the following statements is TRUE? (Assume that the yearly cash flows are identical
for both annuities and that the common interest rate is greater than zero.)
A. The present value of an annuity due is greater than the present value of an ordinary
annuity.
B. The present value of an ordinary annuity is greater than the present value of an annuity
due.
C. The future value of an ordinary annuity is greater than the future value of an annuity
 due.
D. Both B and C are correct.

6. A 5-year ordinary annuity has periodic cash flows of $100 each year. If the interest rate is 8
percent, the present value of this annuity is closest to which of the following?
A. $331.20
B. $399.30
C. $431.24
D. $486.65
E. $586.70

7. A 5-year annuity due has periodic cash flows of $100 each year. If the interest rate is 8
percent, the future value of this annuity is closest to which of the following equations?
A. ($100)(FVIFA at 8% for 5 periods)
B. ($100)(FVIFA at 8% for 4 periods)(1.08)
C. ($100)(FVIFA at 8% for 5 periods)(1.08)
D. ($100)(FVIFA at 8% for 5 periods) + $100
E. ($100)(FVIFA at 8% for 4 periods) + $100

8. A 5-year annuity due has periodic cash flows of $100 each year. If the interest rate is 8
percent, the present value of this annuity is closest to which of the following equations?
A. ($100)(PVIFA at 8% for 4 periods) + $100
B. ($100)(PVIFA at 8% for 4 periods)(1.08)
C. ($100)(PVIFA at 8% for 5 periods)(1.08)
D. ($100)(PVIFA at 8% for 6 periods) - $100
E. Both A and C