MTL 732: Financial Mathematics

Practice Sheet 1

1. At what annual interest rate must Rs 137000 be invested so that it will grow to be Rs 475,000 in
15 years?

2. How many years will it take for Rs 1970 to grow to be Rs 5540 if it is invested in an account with
a quoted annual interest rate of 8% with monthly compounding of interest?

3. Jane, a freshman in college, needs Rs 55000 in 4 years to start studying for an MBA. Her in-
vestments earn 5% interest per year. How much must she invest today to have that amount at
graduation? If she invested once a year for four years, beginning today until the end of the 4 years,
how much must she invest?

4. You are considering three different investments (a) one paying 7compounded annually, (c) one
paying 6% compounded continuously. Which investment has the highest effective annual rate of
return?

5. You plan to borrow Rs 389000 now and repay it in 25 equal annual installments (payments will
be made at the end of each year). If the annual interest rate is 10%, how much will your annual
payments be?

6. You are offered an annuity that will pay Rs 17000 per year for 7 years (the first payment will be
made today). If you feel that the appropriate discount rate is 10%, what is the annuity worth to
you today?

7. You are valuing an investment that will pay you Rs 12000 the first year, Rs 14000 the second year,
Rs 17000 the third year, Rs 19000 the fourth year, Rs 23000 the fifth year, and Rs 29000 the sixth
year (all payments are at the end of each year). What it the value of the investment to you now
is the appropriate annual discount rate is 10%?

8. What is the monthly rate of interest that will yield an annual effective interest rate of 12%?

9. If you require a 9% annual return on your investments, you would prefer Rs 15000 five years from
today rather than an ordinary annuity of Rs 1000 per year for 15 years. True or False?

10. You plan to buy a mobile that cost Rs 25700. You made a down payment Rs 4000. The remaining
cost is financed over a period of 3 years. You will repay the loan by making equal monthly
installments. The interest quoted is 8% per annum with monthly compounding. What is your
monthly payment plan when the payments are to be made at the end of the month.

11. A debt of 4000 bears interest at i(4) = 6%. It is to be repaid back by semi-annual payment of 600.
Determine the number of full payments needed and the final payment.

12. A used I-phone is purchased for 2000 down payment and 200 per month for six years. Interest
is i(12) = 10%. (a) Determine the purchase price of the phone. (b) Assuming no payments are
missed, what single payment at the end of two years will completely pay off the left-out debt?

13. Guptaji is planning for his son’s future education. He is eight now and will start college in 10
years. How much will Guptaji have to set aside at the end of each year to have Rs 65000 in 10
years if the annual interest rate is 7%.
14. Raj’s uncle will give him Rs 250 a month for the next two years starting today. If Raj deposits
every payment in an account paying an annual interest rate of 6% compounded monthly, how
much will he have at the end of three years?

15. Tom and Som purchased bonds on same day. Both bonds are redeemable at par and have a yield
of 6% and face value Rs 10000. (a) If Tom’s bond pays an annual coupon at the rate 8% and
has 15 years to maturity, then how much does he pays for it? (b) If Som’s bond has 10 years to
maturity and he pays Rs 11487.75 for it, what is the annual coupon rate?

16. Som invested Rs 2000 in bond A and Rs 2000 in bond B. On the same day, Tom invests Rs 2000
in bond C and Rs 8000 in bond D. At the end of 6 months, bond A is worth Rs 2050, bond B
worth is Rs 2100, bond C is Rs 2040 and bond D is Rs 8360. Show that Tom has a higher internal
rate of return on his total portfolio while Som has a higher internal rate of return on each of his
bonds.

17. A company is considering its options for a machine to use in production. For 470, the company
can make some small repairs on a current machine, which will make it last for 2 more years. At a
higher cost of 900, the company can make more extensive repairs on the current machine, making
it last for 4 more years. A new machine costs 3000 and will last for eight years. The company is
facing an interest rate of 10%.

18. How much money is needed to establish a scholarship fund paying 1500 annually if the fund will
earn an interest rate of 6% per annum and the first payment is made (i) at the end of the first
year, (ii) at the beginning of the first year, (iii) deferred five years from now.