Question

**Mastery Problem: Time Value of Money**

**Time value of money**

Due to both interest earnings and the fact that money put to good use should generate additional funds above and beyond the original investment, money tomorrow will be worth less than money today.

Simple interest

Ringer Co., a company that you regularly do business with, gives
you a $18,000 note. The note is due in three years and pays simple
interest of 5% annually. How much will Ringer pay you at the end of
that term? Note: Enter the interest rate as a decimal. (i.e. 15%
would be entered as .15)

Principal | + | ( Principal | x | Rate | x | Time | ) | = | Total | |

$ | + | ($ | x | x | years | ) | = | $ |

**Compound interest**

With compound interest, the interest is added to principal in the
calculation of interest in future periods. This addition of
interest to the principal is called compounding. This differs from
simple interest, in which interest is computed based upon only the
principal. The frequency with which interest is compounded per year
will dictate how many interest computations are required (i.e.
annually is once, semi-annually is twice, and quarterly is four
times).

Imagine that Ringer Co., fearing that you wouldn’t take its deal, decides instead to offer you compound interest on the same $18,000 note. How much will Ringer pay you at the end of three years if interest is compounded annually at a rate of 5%? If required, round your answers to the nearest cent.

Principal | Annual Amount of | Accumulated Amount at | |

Amount at | Interest (Principal at | End of Year (Principal at | |

Beginning of | Beginning of Year x | Beginning of Year + Annual | |

Year | Year | 5%) | Amount of Interest) |

1 | $18,000 | $900 | $18,900 |

2 | $18,900 | $ | $ |

3 | $ | $ | $ |

If you were given the choice to receive more or less compounding periods, which would you choose in order to maximize your monetary situation? _____________

Answer #1

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?(Compound interest with? non-annual periods)??Calculate the
amount of money that will be in each of the following accounts at
the end of the given deposit? period:
Account Holder
Amount Deposited
Annual
Interest Rate
Compounding
Periods Per Year (M)
Compounding
Periods (Years)
Theodore Logan III
$1,000
18%
3
10
Vernell Coles
$96,000
10%
2
3
Tina Elliot
$9,000
12%
4
4
Wayne Robinson
$121,000
12%
12
3
Eunice Chung
$30,000
18%
1
4
Kelly Cravens
$15,000
12%
6
3
The amount...

Compound interest is computed on the principal and any interest
earned that has not been withdrawn.
Compound interest is computed on the
principal amount plus paid interest.
principal amount plus accrued interest.
principal amount plus earned interest left on deposit.
principal amount only.
_____
Which of the following is false?
Simple interest is generally applicable to long-term
situations.
For the investor, compound interest is more desirable than
simple interest.
Simple interest uses the initial principal to compute interest
in each...

QUESTION 2-TIME VALUE OF MONEY
Judy Dench took up the government offer on the
“Special Early Retirement Programme” and received a lump sum
payment of J$3.5M. After clearing her mortgage and credit card
debts she has J$1.5M remaining. She saw an advertisement recently
in the local newspaper where JMMB was offering three investments
offer to the public as follow:
Investment Product
Interest Rate
Term
Conditions
Investment A
16%
5 years
Interest is compounded annually. Principal & Interest is
paid at...

Maths of finance
This task assesses the following learning
outcomes:
Time value for money and the rate of return
Assess the simple interest and compound interest
Net Present value in Capital Budgeting (Internal rate of
return, Payback period)
Annuities (PV, FV, Growth Annuities, types of Annuities)
Perpetuities (PV, Growth Perpetuities)
2. The bank offers you some options, however, you can't withdraw
it for 5 years:
a. 8% simple interest
b. 6% compounded semiannual
c. 5.5% compounded monthly Which is the...

Compound interest with non-annual periods) Calculate the
amount of money that will be in EACH of the following accounts at
the end of the given deposit period:
Account Holder
Amount
Deposited
Annual
Interest Rate
Compounding
Periods Per Year (M)
Compounding
Periods (Years)
Theodore Logan III
$
1,000
1212
%
11
55
Vernell Coles
94,000
1212
66
33
Tina Elliot
7,000
88
22
44
Wayne Robinson
120,000
1212
1212
33
Eunice Chung
30 ,000
1616
44
44
Kelly Cravens
17,000
1212...

elated to Checkpoint 5.3) (Compound interest with non-annual
periods) Calculate the amount of money that will be in each of the
following accounts at the end of the given deposit period:
Account Holder
Amount
Deposited
Annual
Interest Rate
Compounding
Periods Per Year (M)
Compounding
Periods (Years)
Theodore Logan III
$
1,100
12
%
3
5
Vernell Coles
96,000
10
2
2
Tina Elliot
7,000
8
12
5
Wayne Robinson
121,000
12
4
5
Eunice Chung
30,000
12
6
4
Kelly...

Maths of finance
This task assesses the following learning
outcomes:
Time value for money and the rate of return
Assess the simple interest and compound interest
Net Present value in Capital Budgeting (Internal rate of
return, Payback period)
Annuities (PV, FV, Growth Annuities, types of Annuities)
Perpetuities (PV, Growth Perpetuities)
3. How long will it take to your money to earn 2000€ at a rate
of 12% simple interest rate?
4. If you want to invest only one part of...

If a capital sum of money P is placed on compound interest at a
rate I compounded annually, show that the future sum of the F,
after the number of interest periods n could be expressed as:
If a sum of £25,000 is invested at the interest rate of 8
percent per year for 10 years. How much will the investor receive
at the end of investment.
To receive £10,000 in the future 20 years from now, how much
should...

Exercise IV (effective and nominal interest rate)
a. The effective interest rate is 21.44%. If there are 12
compounding periods per year, what is the nominal interest
rate?
b. What is the effective interest rate on a continuously
compounded loan that has a nominal interest rate of 25%?
c. Which is the better investment, a fund that pays 20%
compounded annually, or one that pays 18.5 % compounded
continuously?
d. Money invested at 6% per year, compounded monthly. How
money...

a. The effective interest
rate is 21.44%. If there are 12 compounding periods per year, what
is the nominal interest rate?
b. What is the effective interest
rate on a continuously compounded loan that has a nominal interest
rate of 25%?
c. Which is the better
investment, a fund that pays 20% compounded annually, or one that
pays 18.5 % compounded continuously?
d. Money invested at 6% per year,
compounded monthly. How money months you need to triple your
money?...

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