EXERCISE D-1
Purpose: (L.O. 2, 4, 5) This exercise will illustrate some key concepts such as (1) the more frequently interest is compounded, the more interest will accumulate and the lower the present value will be, and (2) the greater the interest rate, the lower the present value will be.
There are a wide variety of situations in which present value concepts must be applied. A few of them are illustrated in the questions that follow.
- If $1,000 is put on deposit today to earn 8% interest, how much will be on deposit at the end of 10 years if interest is compounded annually?
- If $1,000 is put on deposit today to earn 8% interest, how much will be on deposit at the end of 10 years if interest is compounded semiannually?
- In comparing questions 1 and 2, which answer would you expect to be the larger? Why?
- What is the value today of $1,000 due 10 years in the future if the time value of money is 8% and interest is compounded annually?
- What is the value today of $1,000 due 10 years in the future if the time value of money is 8% and interest is compounded semiannually?
- In comparing questions 4 and 5, which answer would you expect to be the larger? Why?
- What is the present value of $1,000 due in 10 years if interest is compounded annually at 10%?
- What is the present value of $1,000 due in 10 years if interest is compounded annually at 6%?
- In comparing questions 7 and 8, which answer would you expect to be the larger? Why?
Instructions
Answer each of the questions above. Interest tables ...
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