Exam 8: Compound Interest: Future Value and Present Value

Henri has decided to purchase a $25,000 car. He can either liquidate some of his investments and pay cash, or accept the dealer's proposal that Henri pay $5000 down and $8000 at the end of each of the next three years. a) Which choice should Henri make if he can earn 7% compounded semiannually on his investments? In current dollars, what is the economic advantage of the preferred alternative? b) Which choice should Henri make if he can earn 11% compounded semiannually on his investments? In current dollars, what is the economic advantage of the preferred alternative? (Hint: When choosing among alternative streams of cash inflows, we should select the one with the greatest economic value. When choosing among alternative streams of cash outflows, we should select the one with the least economic value.)

What amount did the owner of a $10,000 face value compound-interest series S102 CSB receive when he redeemed the bond on: a) November 1, 2009? b) May 19, 2010?

A payment of $8000 is due May 15, 2023. What was the value of this obligation on May 15, 2008 if money can earn 12% compounded quarterly between the two dates?

Nelson borrowed $5000 for years. For the first years, the interest rate on the loan was 8.4% compounded monthly. Then the rate became 7.5% compounded semiannually. What total amount was required to pay off the loan if no payments were made before the expiry of the -year term?

You owe $6000 payable three years from now. What alternative amount should your creditor be willing to accept today if she can earn 4.2% compounded monthly on a low-risk investment?

Follow the instructions in the NET @ssets box earlier in this section to access the interactive chart named "Future Value of $100" in the student textbook's OLC. Use the chart to help you answer these questions. What is the percentage increase in an investment's future value every five years if the investment earns: a) 7% compounded annually? b) 9% compounded annually? c) 11% compounded annually?

Follow the instructions in the NET @ssets box earlier in this section to access the interactive chart named "Future Value of $100" in the student textbook's OLC. Use the chart to help you answer: a) Problem 13. b) Problem 15

Calculate the combined equivalent value of the scheduled payments on the indicated dates. The rate of return that money can earn is given in the fourth column. Assume that payments due in the past have not yet been made. -

On the same date that the CIBC advertised rates of 2%, 2.5%, 3%, 3.25%, and 7% in successive years of its five-year compound-interest Escalating Rate GIC, it offered 2.75% compounded annually on its five-year fixed-rate GIC. How much would have to be initially invested in each GIC to have a maturity value of $20,000?

What is the compounding frequency for a nominal rate of 4.7% if the periodic interest rate is: a) 1.175%? b) %?

If two payment streams are equivalent at one discount rate, will they be equivalent at another discount rate?

Mrs. Janzen wishes to purchase 13year-maturity strip bonds with $12,830 cash she now has in her RRSP. If these strip bonds are currently priced to yield 5.25% compounded semiannually, how many $1000 denomination bonds can she purchase?

Six year old Jerry's grandmother is going to invest $18,000 now to pay for the first two years of Jerry's college education. She plans to provide him with two equal payments. The first will be in 11 years and the second will be in 12 years. If the investment earns 9% compounded semi-annually what will be the size of the two payments?

Zimbabwe's descent into economic chaos during the late 1990s and early 2000s resulted in hyperinflation. By August of 2008, the monthly inflation rate stood at 839%! Retailers were increasing their prices more than once each day. The government had to issue currency in ever rising denominations-the highest denomination note circulating in August 2008 was for $100 billion ($100,000,000,000) Zimbabwean dollars! a. Consider a loaf of bread with a price of $4 at the beginning of a month. With an inflation rate of 839% per month, what would the loaf's price be at the end of a month in order to "keep pace" with inflation? b. In the scenario in part (a), what percentage of its purchasing power did a fixed nominal amount of currency retain at the end of the month? c. What daily per cent price increase, compounded over a 30-day month, would result in an 839% overall price increase during the month? d. Consider a piece of candy priced at just one cent ($0.01) at the beginning of a year. If inflation continued at the rate of 839% per month for an entire year, what would be the inflation-adjusted price of the candy at the end of the year?

The maturity value of an investment after 42 months is $9704.61. What was the original investment if it earned 7.5% compounded semiannually?