Financial Market Basics Assignment 1 (2014-2015)

Full Name: ……………………………………………………… Signature: …...…….…...

Financial Market Basics

Assignment # 1

1. A million Euros is deposited on 1/1/10 at 10% compound interest.

a) What will the cumulative sum be on 1/1/12?

b) How much interest will be received over the two years?

c) What would the cumulative sum have been on 1/1/12 if simple interest had been
received instead? What is the difference between this amount and that generated by
compound interest?

d) What would the cumulative sum have been on 1/1/12 if the deposit had been at: 12%
compound interest? 8% compound interest?
Financial Market Basics Assignment 1 (2014-2015)

Full Name: ……………………………………………………… Signature: …...…….…...

2. A customer signs a Promissory Note drawn at 2 years for €15,000. You decide to take it to
the bank, which offers to discount it at a simple discount rate of 7% per annum. The bank also
charges you a fixed €30 for each transaction. How much will you get after discounting the Note?
What is the implied compound interest rate of the transaction?

3. Assume cumulative annual sales growth of 15%. How many years will it take for the
company’s sales to double?
Financial Market Basics Assignment 1 (2014-2015)

Full Name: ……………………………………………………… Signature: …...…….…...

4. You plan to pay €1,500 into a deposit fund at the end of the year for each of the following
ten years. What will your investment come to at the end of the ten year period if it pays 6%
compound interest?

5. How much should you pay in at the end of each year at a compound interest rate of 9% to
have a fund amounting to €100,000 at the end of the tenth year (last payment 10th year)?

6. A bank is willing to lend a company €100,000 on 1/1/10 in exchange for a repayment of

€131,100 at the end of a four-year term. What interest rate is the bank applying?
Financial Market Basics Assignment 1 (2014-2015)

Full Name: ……………………………………………………… Signature: …...…….…...

7. An unknown institution — The Spendthrift Youth Savings Bank — offers you a €20,000
loan repayable in eight annual installments at an interest rate of 10% and to be amortised in
fixed annual payments, the first of which will fall due on 1/1/11. The Savings Bank makes this
stunning offer on 1/1/10. What is the annual instalment?

8. It is expected that a plot of land will be worth €500,000 in five years’ time. During this
period of time the property of the land would generate additional costs equal to €10,000 per year
(payable at the end of each year). What is the maximum sum you are willing to pay for the land
if the market interest rate is 10% per annum? Give your arguments.
Financial Market Basics Assignment 1 (2014-2015)

Full Name: ……………………………………………………… Signature: …...…….…...

9. On 1/1/10, a company sells a machine in return for three Promissory Notes, each drawn up
for €1 m, repayable from 1/1/11 onwards. Interest rates stand at 10%.

a) What is the Present Value of the sale on 1/1/10? What is the value of the sale at the end
of 1/1/13?

b) If the company decides to start receiving the annual installments beginning on the sale
date (1/1/10), how will this affect the Present Value on 1/1/10 and on 1/1/13?
Financial Market Basics Assignment 1 (2014-2015)

Full Name: ……………………………………………………… Signature: …...…….…...

10. What is the real annual rate of interest if the nominal rate is 12% and inflation stands at 5%?