Question

Time Value of Money I - Worksheet Identify the table that should be used for each of the following situations in the space provided, then show the calculations to solve the problem below. FV – Future Value of 1 PV – Present Value of 1 FVA – Future Value of an Annuity PVA – Present Value of an Annuity _________ 1. Tom bought a zero-coupon bond with an 8% yield. (A zero-coupon bond does not pay interest, but the value of the bond grows throughout its life.) When it matures in 20 years, he will receive $200,000. How much did Tom pay for the bond? _________ 2. You have determined that getting your degree will result in you earning an additional $5,000 per year. If you work 23 more years and save those additional earnings at 3% per year, what will be the additional value of having the degree? _________ 3. The IRS audited Eric’s return from three years ago, and determined that he owed $10,000 at that time, but the IRS also charges 7% interest per year on back taxes. How much does Eric owe the IRS? _________ 4. Will bought his first car 24 years ago for $6,000. He wants to buy a comparable car for his son. If inflation has run about 3% a year since then, how much can Will expect to pay for his son’s car? __________ 5. An investment firm has determined that the market price of a 5-year $100,000 bond yielding 6% is $104,212. This is based on the $100,000 face amount of the bond that the investor will receive when the bond matures and the $7,000 annual interest the bond will pay until that time. (Hint: There are two tables.) _________ 6. Matt is receiving an annuity of $8,500 a year from his dad’s estate. There are 12 years of payments left. ABC Company has offered him $60,000 now in exchange for the future payments. His investment account is returning 7%. Should he take the offer?

Answer 1