Practice Questions: Time Value of Money (TVM) & Its Applications in Investments 1. Jose now has $500. How much would he have after 6 years if he leaves it invested at 5. 5% with annual compounding? a. $591. 09 b. $622. 20 c. $654. 95 d. $689. 42 e. $723. 89 N6 I/YR5. 5% PV$500 PMT$0 FV$689. 42 2. How much would $5,000 due in 25 years be worth today if the discount rate were 5. 5%? a. $1,067. 95 b. $1,124. 16 c. $1,183. 33 d. $1,245. 61 e. $1,311. 17 N25 I/YR5. 5% PMT$0 FV$5,000 PV$1,311. 17 3. Suppose the U. S. Treasury offers to sell you a bond for $747. 5. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? a. 4. 37% b. 4. 86% c. 5. 40% d. 6. 00% e. 6. 60% N5 PV$747. 25 PMT$0 FV$1,000. 00 I/YR6. 00% 4. You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6. 0%? Years:01234 ||||| CFs:$0$1,000$2,000$2,000$2,000 a. $5,987 b. $6,286 c. $6,600 d. $6,930 e. $7,277

I/YR = 6. 0% 01234 CFs:$0$1,000$2,000$2,000$2,000 PV of CFs:$0$943$1,780$1,679$1,584 PV = $5,987Found using the Excel NPV function. PV = $5,987Found by summing individual PVs. PV = $5,987Found using the calculator NPV key. 5. At a rate of 6. 5%, what is the future value of the following cash flow stream? Years:01234 ||||| CFs:$0$75$225$0$300 a. $526. 01 b. $553. 69 c. $582. 83 d. $613. 51 e. $645. 80 I/YR = 6. 5% 01234 CFs:$0$75$225$0$300 FV of CFs:$0$91$255$0$300 FV = $645. 80Found by summing individual FVs. FV = $645. 80Found with the NFV key in some calculators.

FV = $645. 80Found with a calculator by first finding the PV of the stream, then finding the FV of that PV. PV of the stream:$501. 99 FV of the PV:$645. 80 6. What’s the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually? a. $1,819 b. $1,915 c. $2,016 d. $2,117 e. $2,223 Years5 Periods/Yr2 Nom. I/YR6. 0% N = Periods10 PMT$0 I = I/Period3. 0% PV = $1,500 Could be found using a calculator, an equation, or Excel. FV = $2,016 Note that we must first convert to periods and rate per period 7.

An investor plans to buy a common stock and hold it for two years. The investor expects to receive $1. 5 in dividend a year and $26 from the sales of the stock at the end of year 2. If the investor wants a 15% return (compound annually), the maximum price the investor should pay for the stock today is roughly: A). $24 B). $28 C). $22 D). $32 E). $26 C). $22 (n=2, pmt = 1. 5, fv = 26, I = 15%, PV = ? ) 8. Morin Company’s bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8. % on these bonds. What is the bond’s price? a. $903. 04 b. $925. 62 c. $948. 76 d. $972. 48 e. $996. 79 N8 I/YR8. 2% PMT$65 FV$1,000 PV$903. 04 9. Sadik Inc. ‘s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100.

What is their yield to call (YTC)? a. 6. 63% b. 6. 98% c. 7. 35% d. 7. 74% e. 8. 12% N5 PV$1,180 PMT$105 FV$1,100 I/YR = YTC7. 74% 10. Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9. %. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8. 4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? a. $1,105. 69 b. $1,133. 34 c. $1,161. 67 d. $1,190. 71 e. $1,220. 48 Par value$1,000 Coupon rate9. 5% Periods/year2 Yrs to maturity20 Periods = Yrs to maturity ? Periods/year40 Required rate8. 4% Periodic rate = Required rate/2 = I/YR4. 20% PMT per period = Coupon rate/2 ? Par value$47. 50 Maturity value = FV$1,000 PV$1,105. 69