Chapter 5

Time Value of Money

Group 4: Chong, Fernandez, Maguan, Ymana
5-21
I = 7% a. 10 end-of-year payments n=10

I-payment
PV = 61,000,000

10 end-of-year
payments
PMT= 9,500,000

30 end-of-year
payments
PMT= 5,500,000
5-21
I = 7% a. 30 end-of-year payments n=30

I-payment
PV = 61,000,000

10 end-of-year
payments
PMT= 9,500,000

30 end-of-year
payments
PMT= 5,500,000
5-21
I = 7% a. Which should she choose?

I-payment
PV = 61,000,000
She should accept the 30-year payment option
10 end-of-year as it carries the highest present value
payments ($68,249,727).
PMT= 9,500,000

30 end-of-year
payments
PMT= 5,500,000
5-21
I = 8% b. 10 end-of-year payments n=10

I-payment
PV = 61,000,000

10 end-of-year
payments
PMT= 9,500,000

30 end-of-year
payments
PMT= 5,500,000
5-21
I = 8% b. 30 end-of-year payments n=30

I-payment
PV = 61,000,000

10 end-of-year
payments
PMT= 9,500,000

30 end-of-year
payments
PMT= 5,500,000
5-21
I = 8% b. Which should she choose?

I-payment
PV = 61,000,000
She should accept the 10-year payment as it
10 end-of-year carries the highest present value ($63,745,773)
payments
PMT= 9,500,000

30 end-of-year
payments
PMT= 5,500,000
5-21
I = 9% c. 10 end-of-year payments n=10

I-payment
PV = 61,000,000

10 end-of-year
payments
PMT= 9,500,000

30 end-of-year
payments
PMT= 5,500,000
5-21
I = 9% c. 30 end-of-year payments n=30

I-payment
PV = 61,000,000

10 end-of-year
payments
PMT= 9,500,000

30 end-of-year
payments
PMT= 5,500,000
5-21
I = 8% c. Which should she choose?

I-payment
PV = 61,000,000
She should accept the lump-sum payment
10 end-of-year option as it carries the highest present value
payments ($61,000,000)
PMT= 9,500,000

30 end-of-year
payments
PMT= 5,500,000
5-21
I = 8% d. Explain how interest rates influence the
optimal choice?
I-payment The lower the interest rate, the higher the PVA. The higher
PV = 61,000,000 the PVA compared to other options, the more likelihood
that it is the optimal choice. For letter a, the optimal choice
10 end-of-year is the 30-year payment option since it has the highest
payments PVA. For letter b, the optimal choice is the 10-year
payment option since it has the highest PVA compared to
PMT= 9,500,000
other options. Lastly for letter c, the optimal choice is
lump-sum payment options as it holds the highest PVA.
30 end-of-year
payments
PMT= 5,500,000
5-22
Mortgage a.
payment= 10,000

Normal Interest
Rate= 10%

10-year
mortgage
5-22
a.
Mortgage
payment= 10,000

Normal Interest
Rate= 10%

10-year
mortgage
5-22
Mortgage b.
payment= 10,000

Normal Interest
Rate= 10%

10-year
mortgage
5-22
Mortgage b. Explanation
payment= 10,000

Normal Interest Because the mortgage balance declines with

Rate= 10% each payment, the portion of the payment that
is applied to interest declines, while the portion
of the payment that is applied to principal
10-year
increases. The total payment remains constant
mortgage over the life of the mortgage
5-22
Mortgage c.
payment= 10,000

Normal Interest Jan must report interest of $984.88 on

Rate= 10% Schedule B for the first year. Her interest
income will decline in each successive year for
the reason explained in Part b.
10-year
mortgage
5-22
Mortgage d.
payment= 10,000
Interest is calculated on the beginning balance
Normal Interest for each period, as this is the amount the lender
Rate= 10% has loaned and the borrower has borrowed. As
the loan is amortized (paid off), the beginning
balance, hence the interest charge, declines
10-year
and the repayment of principal increases.
mortgage
5-27
Nominal rate= Option A
4%

m= 1
5-27
Nominal rate= Option B
3.5%

m= 365
5-27
Nominal rate= b.
4%

m= 1 If funds must be left on deposit until the end of

the compounding period (1 year for Bank A and
1 day for Bank B), and you think there is a high
probability that you will make a withdrawal
during the year, then Bank B might be
preferable.
5-27
Nominal rate= b. continuation
4%

m= 1 Ten or more years ago, most banks were set

up as described above, but now virtually all are
computerized and pay interest from the day of
deposit to the day of withdrawal, provided at
least $1 is in the account at the end of the
period.
5-28
Nominal rate=
6%

m= 12
5-29
Nominal rate=
12%

m= 360

n= 90
5-31
PMT = 10,000 A.

I = 5%
PVA = 10,000(1/0.05 - 1/0.05(1+.05)⁴)
N = 4 years
PVA = 10,000(20 - 16.4540495)
PVA = PMT(1/i -
PVA = 35,459.505
1/i(1+i)ⁿ )
B.
X = 35,459.505(1.05) - 10,000
X = 27,232.48
5-32
PMT = $1,500
I = 8%
N=6
Last PMT less
than $1,500
How large will
your last
payment be?
5-35
a)
Mortgage=$90,000
I = 7%
N=3
PMT no more than
$7,500
How large would each
annual payment be?
Could you afford those
payments?
5-35
b)
Mortgage=$90,000
I = 7%
N = 30
PMT no more than
$7,500
What would each
payment be? Could you
afford those payments?
5-35
c)
PMT =
$7,252.78
I = 7%
N = 27
5-36
a)
PMT = $1,000
N=5
I = 4%/2 = 2%
How much will
be in your
account after
3 years?
5-36
b) 1. Find the PV of $10,000 one year
from today
FV = $10,000
N=4
I = 4%/4 = 1%
5-36 2. Find the value of annuity with 2
quarterly payments that corresponds to
b) the PV
PVA =
$9,609.8
N=2
I = 4%/4 = 1%
How large
must each of
the two
payments be?
5-37 If Simon makes the minimum monthly payment and
makes no other changes, how many months will it be
before he pays off the card? Round to the nearest month.
a)
inom = 18%/year inom = 18%/year ---> iper = 18%/12 = 1.5%/month
PVA = $350
PMT = $10/month
5-37 If Simon makes the minimum monthly payment and
makes no other changes, how many months will it be
before he pays off the card? Round to the nearest month.
a)
inom = 18%/year

PVA = $350
PMT = $10/month

n = 50.000 months
5-37 If Simon makes monthly payments of $30, how many
months will it be before he pays off the debt? Round to
the nearest month.
b)
inom = 18%/year inom = 18%/year ---> iper = 18%/12 = 1.5%/month
PVA = $350
PMT = $30/month
5-37 If Simon makes monthly payments of $30, how many
months will it be before he pays off the debt? Round to
the nearest month.
b)
inom = 18%/year

PVA = $350
PMT = $30/month

n = 12.921 months
n = 13 months
5-37 How much more in total payments will Simon make under
the $10-a-month plan than under the $30-a-month plan?
Make sure you use 3 decimal places for n.
c)
PMTTotal = (PMT)(# of months)

a. $10/month:

PMTTotal = ($10)(50.000 months)

PMTTotal = $500

b. $30/month:

PMTTotal = ($30)(12.921 months)

PMTTotal = $387.63
5-37 How much more in total payments will Simon make under
the $10-a-month plan than under the $30-a-month plan?
Make sure you use 3 decimal places for n.
c)
5-38 How large a check must the city write on December 31,
2012?
2010 Salary:
$34,000

2011 Dmg+Lawyer:
$120,000
Amounts Due Adjustments
Raises: 3%
2010: $34,000 $34,000 x (1.07) =$ 36,380
i = 7% 2011: $34,000 x (1.03) = $35,020 - $ 35,020
2012: $34,000 x (1.03)2 = $36,070.6 $36,070.6 / (1.07) = $ 33,710.8
2013: $34,000 x (1.03)3 = $37,152.72 $37,152.72 / (1.07)2= $ 32,450.6
Working time (from 2014: $34,000 x (1.03)4 = $38,267.3 $38,267.3 / (1.07)3 = $ 31,237.5
2011): 3 years 2011 Dmg + Lawyer: $120,000 - $ 120,000
PMT (2011 PV) =$ 288,798.9
PMT (2012 PV) =$ 288,798.9 x (1.07)

PMT (2012 PV) =$ 309,014.82

5-39 How much must he save during each of the next 10
years(end-of-year deposits) to meet his retirement goal?
Fixed Retirement Inc:
$40,000 (PV) a. Future Value of Fixed Retirement

Retire: 10 years
FV = ($40,000)(1.05)10
Lifespan: 25 years
after retiring FV = $65,155.79

iinflation = 5%
b. Future Value of Current Savings
iinterest = 8%

FV = ($100,000)(1.08)10

FV = $215,892.5
5-39 How much must he save during each of the next 10
years(end-of-year deposits) to meet his retirement goal?
Fixed Retirement Inc: c. Present Value of Annuity for Retirement Fund
$40,000 (PV) to Reach Desired Income

(1+i)
Retire: 10 years

Lifespan: 25 years (1.08)

after retiring

iinflation = 5% PVA = $751,165.36

iinterest = 8% d. Money Needed to Accumulate by 10 Years

Money Needed = PVAC - FVB

Money Needed = $ 751,165.36 - $215,892.5

Money Needed = $535,272.86

5-39 How much must he save during each of the next 10
years(end-of-year deposits) to meet his retirement goal?
Fixed Retirement Inc:
$40,000 (PV) e. Money Needed per Year (Presently)

Retire: 10 years

Lifespan: 25 years
after retiring $535,272.86

iinflation = 5%

iinterest = 8%
PMT = $36,949.61 yearly