Exam 8: Compound Interest: Future Value and Present Value

Stan purchased a $15,000 compound-interest Series103 Canada Savings Bond on December 1, 2008. The interest rate in the first year was 2.5% and in the second year was 3.00%. What interest did he receive when he redeemed the CSB on May 1, 2010?

Calculate the original principal:

On February 1, 2007, Selma purchased a $50,000 compound-interest CSB. The interest rate on the CSB was 1.55% for each of the first two years and 2.675% for the third year. What was the total interest earned on the CSB by the time Selma redeemed the bond on April 1, 2009? (Taken from CIFP course materials.)

A bond pays $1000 interest at the end of every year for the next 30 years. What is the current economic value of each of the 15^th and 30^th payments if we discount the payments at: a) 5% compounded semiannually? b) 8% compounded semiannually?

Ramon wishes to replace payments of $900 due today and $500 due in 22 months by a single equivalent payment 18 months from now? If money is worth 5% compounded monthly, what should that payment be?

Boris recently turned 30, an event causing him to give thought to some long-range financial planning. He believes that, if he owns a home and is debt-free by age 60, he and his partner can retire and live comfortably on an annual income that is equivalent to $40,000 today. Fill in the cells of the following table with the nominal annual income needed to satisfy this criterion at each age under each of three inflation rate scenarios.

What periodic payment will an investor receive from a 10-year, $250,000 annual payment GIC earning a nominal rate of 5.88% compounded annually?

Judy invested $8500 in a three-year compound-interest GIC earning 6% compounded monthly. What is the GIC's maturity value?

Consider a $10,000 face value Government of Canada strip bond from the issue in Table 8.3 that matures on June 1, 2025. Assume the yield does not change as years go by. a) What will be the bond's value on December 1, 2016? b) What will be the bond's value on December 1, 2020? c) Suppose you invest an amount equal to the answer from Part (a) at 4.08% compounded semiannually for four years. What will its maturity value be? d) To three-figure accuracy, why do you get the same answers for Parts (b) and (c)?

A $1000 investment is made today. Calculate its maturity values for the six combinations of terms and annually compounded interest rates in the following table.

A $15,000 loan at 11.5% compounded semiannually is advanced today. Two payments of $4000 are to be made 1 year and 3 years from now. The balance is to be paid in 5 years. What will the third payment be?

Calculate the present value of a payment of $27,500 payable in 10 years if money is worth 9% compounded semi-annually.

Explain the difference between "compounding period" and "compounding frequency."

Calculate the maturity value of $2000 invested in a five-year compound-interest GIC earning 4.1% compounded annually?

Calculate the missing value:

What amount would have to be invested today for the future value to be $10,000 after 20 years if the rate of return is: a. 5% compounded quarterly? b. 7% compounded quarterly? c. 9% compounded quarterly?

Calculate the maturity value:

A $5000 payment due 1½ years ago has not been paid. If money can earn 8.25% compounded annually, what amount paid 2½ years from now would be the economic equivalent of the missed payment?

Eighteen years from now I will need to have $120,000 to pay for my child's post-secondary education. I anticipate being able to earn 14% compounded annually for the first 10 years and 11% compounded annually for years #11 through #20. What amount of money should I invest today in order to meet my goal?

A $1000 face value strip bond has 19 years remaining until maturity. What is its price if the market rate of return on such bonds is 5.9% compounded semiannually? At this market rate of return, what will be the increase in the value of the strip bond during the fifth year of ownership?