ACC 210 Lecture Notes - Lecture 20: Interest

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harlequinhound237

2 Jun 2018

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Appendix C notes

• Time value of money

o Decease in value of money due to the passage of time ($100

right now is worth more than $100 one year from now)

o Bc we could invest the $100 today and it would grow to a larger

amount (with interest) in one year

o $100 + ($100 x 10%) = $110

• Simple interest

o Interest earned on the initial investment

• Compound interest

o Interest earned on the initial investment and on previous earned

(but unpaid) interest

• Use compound interest in our problems

o Need to know the number of compounding periods

• Future value

o How much an amount today will grow to be in the future

▪ N=0 is the initial investment

▪ Future value at the end of the first year is $1,100 (1,000 +

1.10)

• Represents 10% growth of a growing base amount

each year

o How to read a future value table

▪ The table contains the future value of $1 invested for

various periods of time (n) and various interest rates (i)

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Related Questions

Time Value of Money: Basics
Using Table 12A.1 and Table 12A.2 of this chapter, determine the answers to each of the following independent situations. (Round answers to the nearest whole number.)

(a) The future value in three years of $1,000 deposited today in a savings account with interest compounded annually at 8 percent.

(b) The present value of $5,000 to be received in five years, discounted at 10 percent.

(d) An initial investment of $14,904 is to be returned in eight equal annual payments. Determine the amount of each payment if the interest rate is 12 percent.

(e) A proposed investment will provide cash flows of $50,000, $10,000, and $7,000 at the end of Years 1, 2, and 3, respectively. Using a discount rate of 20 percent, determine the present value of these cash flows.

(f) Find the present value of an investment that will pay $7,000 at the end of Years 10, 11, and 12. Use a discount rate of 12 percent.

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Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stockâs current price, S₀, is $100, and the call option expiring in one year has an exercise price, X, of $100 and is selling at a price, C, of $10. With $10,000 to invest, you are considering three alternatives:

a. Invest all $10,000 in the stock, buying 100 shares.

b. Invest all $10,000 in 1,000 options (10 contracts).

c. Buy 100 options (one contract) for $1,000 and invest the remaining $9,000 in a money market fund paying 4% interest annually.

a. Calculate the value of the investment for stock price one year from now? (Leave no cells blank - be certain to enter "0" wherever required.)

The Prices are $80, $100, $110, $120

All stocks(100 shares)

All Options (1000 Shares)

Bills + 100 options

b. Calculate the rate of return on investment for stock price one year from now? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 1 decimal place.)

The Prices are $80, $100, $110, $120

All stocks(100 shares)

All Options (1000 Shares)

Bills + 100 options

limeweasel875



Part One: Quantitative Exercises

Questions	Answers
1. Future Value. What is the future value of
a. $800 invested for 14 years at 11 percent compoundedannually?
b. $210 invested for 8 years at 9 percent compounded annually?
c. $650 invested for 12 years at 8 percent compoundedannually?

2. Present Value. What is the present value of
a. $803 to be received 18 years from now at a 10 percent discountrate?
b. $406 to be received 7 years from now at a 5 percent discountrate?
c. $400 to be received 10 years from now at a 9 percent discountrate?

3. Future Value of an Annuity. What is the future value of
a. $557 a year for 12 years at 5 percent compounded annually?
b. $748 a year for 9 years at 12 percent compounded annually?
c. $442 a year for 7 years at 11 percent compounded annually?

4. Present Value of an Annuity. What is the present valueof
a. $1,163 a year for 12 years at an 7 percent discount rate?
b. $329 a year for 6years at a 12 percent discount rate?
c. $365 a year for 20 years at a 14 percent discount rate?

5. How many years will it take to grow
a. $765 to a value of 2,028.19 at a compound rate of 14percent?
b. $321 to a value of 450.22 at a compound rate of 12 percent?
c. $881 to a value of 1,305.78 at a compound rate of 7percent?

6. Interest Rate. At what interest rate will it take togrow
a. $800to a value of 1,017.13 over 6 years?
b. $600 to a value of 1,082.08 over 5 years?
c. $401 to a value of 1,311.16 over 6 years?

7. Car Loans (Hint: P/Y=12). How much is a car loan with apayment of
a.$453 per month for 3 years at 6% interest per year?
b.$466 per month for 5 years at 15% interest per year?
c.$301 per month for 6 years at 7% interest per year?

8. Mortgages (Hint: P/Y=12).
What was the initial mortgage on thehouse?
a.$4,369.66 per month for 30 years at 8 percent interest?
b.$1,626.83 per month for 15 years at 4 percent interest?
c. $3,724.21 per month for 30 years at 18 percent interest?

9. Mortgages (Hint: P/Y=12). What is the payoff on a 30year, 6% mortgage of
a.$255,413 with a payment of 1,321.33 with 8 years remaining?
b.$530,493 with a payment of 3,180.57 with 12 years remaining?
c. $297,266 with a payment of 1,782.26 with 11 yearsremaining?

ACC 210 Lecture Notes - Lecture 20: Interest

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