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Problems Chapters 4 and 5 Revised

This document contains 14 problems related to concepts in finance such as simple versus compound interest, calculating present and future values, interest rates, loan payments, and perpetuities. The problems cover a range of calculations including determining interest earned on bank accounts over time, solving for unknown rates, periods, values, and payments given various cash flows with different interest rates, periods, and payment amounts.

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Kyla Alyssa Samia
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50 views3 pages

Problems Chapters 4 and 5 Revised

This document contains 14 problems related to concepts in finance such as simple versus compound interest, calculating present and future values, interest rates, loan payments, and perpetuities. The problems cover a range of calculations including determining interest earned on bank accounts over time, solving for unknown rates, periods, values, and payments given various cash flows with different interest rates, periods, and payment amounts.

Uploaded by

Kyla Alyssa Samia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Problems Chapters 4 and 5.

1. Simple Interest versus Compound Interest. First City Bank pays 6 percent simple
interest on its savings account balances, whereas Second City Bank pays 6 percent
interest compounded annually. If you made a deposit of P8,100 in each bank, how
much money would you earn from each banks’ account at the end of 10 years?

2. Calculating Future Values. Compute the future value for each of the following.
Present value Years Interest rate Future value
P3,150 7 13%
8,453 16 7
89,305 19 9
227,382 26 5

3. Calculating Present Values. Compute the present value for each of the following.
Present value Years Interest rate Future value
15 7% P17,328
8 11 41,517
13 10 790,382
25 13 647,816

4. Solve for the Unknown Interest Rates. Solve for the unknown interest rate in each
of the following:
Present value Years Interest rate Future value
P715 11 P1,381
905 8 1,718
15,000 23 141,832
70,300 16 312,815

5. Calculating the Number of Periods. Solve for the unknown number of years in
each of the following:
Present value Years Interest rate Future value
P195 9% P873
2,105 7 3,500
47,800 12 326,500
38,650 19 213,380
6. Present value of an Annuity. Determine the present value of the following if a.
Ordinary Annuity and b. Annuity Due
Amount Interest Rate Frequency Years
P5,000 10% Annually 5 years
P3,000 10% Semi annually 3 years
P2,000 10% Monthly 2 years

7. Future value of an Annuity. Determine the Future Value of the following if a.


Ordinary Annuity and b. Annuity Due
Amount Interest Rate Frequency Years
P5,000 10% Annually 5 years
P3,000 10% Semi annually 3 years
P2,000 10% Monthly 2 years

8. Present Values and Multiple Cash Flows. Ellis Company has identified an
investment project with the following cash flows. If the discount rate is 10 percent,
what is the present value of these cash flows? What is the present value at 18
percent? At 24 percent?

Year Cash Flows


1 P 680
2 490
3 975
4 1,160

9. Present Values and Multiple Cash Flows. Investment X offers to pay you P3,400
per year for nine years, whereas Investment Y offers to pay you P5,200 per year for
five years. Which of these cash flow streams (ordinary annuity) has the higher
present value if the discount rate is 6 percent? If the discount rate is 22 percent?

10. Future Values and Multiple Cash Flows. Booker Inc., has identified an investment
project with the following cash flows. If the interest rate is 8 percent, what is the
future value of these cash flows in Year 4? At 11 percent? At 24 percent?
Year Cash Flows
1 P 985
2 1,160
3 1,325
4 1,495
11. Calculating Perpetuity Values. Curly’s Life Insurance Co., is trying to sell you an
investment policy that will pay you and your heirs P30,000 per year forever. If the
required return on this investment is 6 percent, how much will you pay for the policy?
Supposed Curly’s told you that the policy is worth P645,000, at what interest rate
would this be a fair deal?

12. Calculating EAR. First National Bank charges 10.1 percent compounded monthly
on its business loans. On the other hand, First United Bank charges 10.30 percent
compounded semi-annually. As a potential borrower, which bank would you go to for
a new loan?

13. Calculating APR. Vandermark Credit Corp. wants to earn an effective annual return
on its consumer loans of 14.20 percent per annum. The bank uses daily
compounding on its loans. What interest rate is the bank required by law to report to
potential borrowers? Explain why this is misleading to an uninformed borrower?

14. Calculating Loan Payments. You want to buy a new sports car for P73,400, and
the finance office at the dealership has quoted you a loan with an APR of 5.10
percent for 60 months to buy the car. What will your monthly payments be? What is
the effective annual rate on this loan?

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