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MGT411 Assignment No1

The document discusses the relationship between future value, interest rates, and investment periods, emphasizing the role of compounding in increasing investment returns. It provides calculations for future value using a compound interest formula and present value using a discount rate. Specific examples include an investment of Rs. 500 at 6% interest over 3 years and the present value of Rs. 200 expected in 4 years at a 7% discount rate.

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14 views3 pages

MGT411 Assignment No1

The document discusses the relationship between future value, interest rates, and investment periods, emphasizing the role of compounding in increasing investment returns. It provides calculations for future value using a compound interest formula and present value using a discount rate. Specific examples include an investment of Rs. 500 at 6% interest over 3 years and the present value of Rs. 200 expected in 4 years at a 7% discount rate.

Uploaded by

adnankazmishah12345
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Semester Fall 2024

Money & Banking


MGT 411
Assignment No1
Student Name: Syed Adnan Ali Shah
Student I’d: bc220417882
Assignment Questions:
1.Why does the future value of an investment increase with a higher interest rate or a
longer investment period? Explain the effect of compounding in this process.
Solution:
The future value of an investment increases with a higher interest rate or a longer investment
period due to the power of compounding. Compounding occurs when the interest earned on an
investment is reinvested to earn additional interest over time. This process creates a "snowball
effect," where not only the initial principal but also the accumulated interest generates further
earnings.
1. Higher Interest Rate:
A higher interest rate means that the investment earns more each period. Since this earned
interest is added to the principal, it contributes to a larger amount on which future interest is
calculated. As a result, with a higher rate, the future value of the investment grows faster due to
more substantial contributions from compounding.
2. Longer Investment Period:
The longer the investment period, the more opportunities there are for interest to compound.
Even with a modest interest rate, over a long period, the reinvested interest can grow
significantly. The impact of compounding becomes more noticeable as time goes on, leading to
an exponential increase in future value over extended periods.
Effect of Compounding: Compounding magnifies growth because each period’s interest is
calculated on an increasing balance, which includes previous interest earnings. Therefore, both a
higher interest rate and a longer period increase the future value by accelerating this
compounding process.
2.Suppose you invest Rs. 500 at an annual interest rate of 6% for a period of 3 years. Use
the compound interest formula to find the future value of this investment.
Solution:
To calculate the future value of an investment using the compound interest formula, we use:
A = P *(1+r/n )n*t
Where:
A = Future value of the investment
P = Principal amount (initial investment), which is Rs. 500
r = Annual interest rate (decimal), which is 6% or 0.06
n = Number of times interest is compounded per year (n=1)
t = Number of years, which is 3
Plugging in the values:
A = 500*(1 + 0.06/1)1*3
A = 500 \(1.06)3
Calculating this:
A = 500* 1.191016 = 595.51
So, the future value of the investment after 3 years is approximately Rs. 595.51.
3.You expect to receive Rs. 200 after 4 years. If the annual discount rate is 7%, what is the
present value of this amount?
Solution:
To calculate the present value (PV) of an amount you expect to receive in the future, you can use
the formula:
PV = FV/1 + rn
where:
Fv is the future value (Rs. 200),
r is the discount rate (7% or 0.07),
n is the number of years (4).
Plugging in the values:
PV =( 200\1 + 0.07)4
PV = (200\1.07)4
PV =200\1.3108
PV = 152.13
So, the present value of Rs. 200 to be received in 4 years at a 7% discount rate is approximately
Rs. 152.13.

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