Exam 8: Compound Interest: Future Value and Present Value

Sam borrowed $2,000 at 5.5% compounded quarterly. After one year, he paid $1,000 towards the outstanding balance. How much will Sam owe after two years?

A current study shows that the demand for widgets is expected to decrease by 3% per year over the next seven years. If production is now 450,000 units, how many units does the company expect to produce in seven years?

What is meant by the future value of an investment?

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.

How much will you need 20 years from now to have the purchasing power of $100 today if the (compound annual) rate of inflation during the period is: a) 2%? b) 3%? c) 4%?

Commercial Finance Co. buys conditional sale contracts from furniture retailers at discounts that provide a 12% compounded monthly rate of return on the purchase price. What total price should Commercial Finance pay for the following three contracts: $950 due in 4 months, $780 due in 6 months, and $1,270 due in 5 months?

A 30-year, $10,000 strip bond was originally issued at 5% compounded semi-annually. Ten years later the original purchaser sold the bond at the prevailing market rate at that time which was 7% compounded semi-annually. How much profit did the original purchaser earn over the 10 years?

An investor has a choice of three investments, 6.85% compounded quarterly, 7% pa, and 6.6% compounded monthly. Which rate should the investor choose?

A $15,000 loan at 5.5% compounded semi-annually is advanced today. Two payments of $4,000 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?

If Murphy puts $45,000 into an investment that earns 12% compounded monthly, and after three years he withdraws $30,000, how much money will the investment be worth seven years after the withdrawal?

Everyone thought he was being foolish again when, 65 years ago, great-great-uncle Crazy Louie invested $150 in the common stock of a company that produced a carbonated soft drink in Atlanta Georgia. The value of the stock has grown at an average rate of 15% compounded semi-annually. What's the value of Crazy Louie's foolish investment now?

Why does $100 due one year from now have less economic value than $100 has today? What do you need to know before you can determine the difference between the economic values of the two payments?

What will be the maturity value of $800 invested at 3.75% compounded quarterly after five years?

If Smitty is able to earn 11% compounded semi-annually on his $750 investment, how much money will he have in 40 years?

What single payment 6 months from now would be equivalent to payments of $500 due (but not paid) 4 months ago, and $800 due in 12 months? Assume money can earn 7.5% compounded monthly.

Mateo deposits $5,000 at the end of years 2, 4 and 6. If interest is 8.2% compounded annually, determine the value at the end of year 6.

What amount 15 months ago is equivalent to $2,600, 1½ years from now? Assume money can earn 5.4% compounded monthly.

A 25-year, $1,000 strip bond was first issued at 5.5% compounded semi-annually. Five years before maturity it was sold on the bond market at a price that would provide the purchaser with a yield rate of 6.8% compounded semi-annually. What was the selling price at that time?

Payments of $2,000 due six months ago and $5,000 due three years from now, are to be replaced by two equal payments due now and one year from today. What is the amount of each payment if money is worth 12% compounded monthly? Use a focal date of today.

A trust company offers 3-year compound-interest GICs earning 4.8% compounded monthly or 4.9% compounded semi-annually. Which rate should an investor choose?