Time Value of Money
Would you like to receive $100 now or $100 one year later?
If the interest rate is 10%, would you like to receive $100 now or $110 one year later?
Suppose you borrow $200 at an annual interest rate of 8%. How much will you have to pay in 5
years, to payoff your debt?
Suppose you would like to have $10,000 in your bank account in 7 years. How much do you have to deposit today
in an account that pays 6% interest per year?
Leo’s grandfather deposited $900 in a savings account for him when he was born. The money has been earning an
annual rate of 10% interest for the last 15 years. He now wants to buy a new car. How much does he have in this
account to use?
Leo’s grandfather deposited $900 in a savings account for him when he was born. The money has been earning an
annual rate of 10% interest, compounded quarterly for the last 15 years. He now wants to buy a new car. How
much does he have in this account to use?
Suppose you win $100 million in lottery. The money is paid in equal annual installments of $4 million over 25
years. If the appropriate discount rate is 10%, how much is the lottery worth today?
A financial asset promises to pay $100 at the end of each year forever. If the required rate of return is 10%, what is
the price of this financial asset today?
You have a chance to buy an annuity that pays $600 at the beginning of each year for 3 years. You could earn 5.5%
on your money in other investments with equal risk. What is the most you should pay for the annuity today?
In 10 years, you plan to retire and buy a house in Madison, WI. The house you are looking at currently costs $200,000
and is expected to increase in value each year at a rate of 5%. Assuming you can earn 10% annually on your investment,
how much must you invest at the end of each of the next 10 years to be able to buy your dream home when you retire?
If you can earn 9% on an investment, how long does it take for your money to double?
To buy a new house, you must borrow $270,000. To do this, you take out a $270,000, 30-year, 9% mortgage. Your
mortgage payments, which are made at the end of each year (one payment each year), include both principal and
9% interest on the declining balance. How large will your annual payments be?
What is the effective annual rate of 12% compounded monthly?