FIN Chapter 5

Calculator question: I got wrong answers all the time, even with the correct input. What is
wrong?

• My calculator is defective

• My P/YR (or P/Y) setting is wrong. It is supposed to be 1 for the input provided in class
  and in homework.

• All the solutions are incorrect.

• My calculator is possessed by an invisible force.

If $100 is placed in an account that earns a nominal 4 percent, compounded quarterly,
what will it be worth in 5 years?

• $122.02

• $105.10

• $135.41

• $120.90

• $117.48

Answer explanation

Answer: PV=100(1+0.04/4)^4x5=122.02
PV=-100, I/Y=1, N=20, Pmt =0, FV =? 122.02

If you deposit $1000 in your bank, when you take it out two years later, it grows to $1269.
With monthly compounding, what is the interest rate?

• 1%

• 10%

• 12%

• None of the above

Answer explanation

Answer C PV = -1000, FV = 1269, N= 24, PMT =0, I/Y=? =1.
nominal interest rate =12 x 1% =12%

You are currently investing your money in a bank account that has a nominal annual rate
of 7 percent, compounded monthly. How many years will it take for you to double your
money?

• 8.67

• 9.15

• 9.50

• 9.93

• 10.25

Answer explanation

I = 7/12; PV = -1; PMT = 0; FV = 2; and then solve for N = 119.17 months = 9.93 years.

If you deposit $1000 in your bank, when you take it out two years later, it grows to
$1215.51. With semiannual compounding, what is the (nominal) interest rate?

• 5%

• 10%

• 11%

• none of the above

Answer explanation

PV = -1000, FV=1215.51, PMT=0, N=4. I/Y=? I/Y=5%, k=5x2=10%

How long does it take for $1,000 to grow into $1126.82 at 12% compounded monthly?

• 12 years

• 2 years

• 1 year

• none of the above

Answer explanation

PV=-1000, FV=1126.82 , I/Y=1 , PMT=0, N=?, N=12 Months , or 1 year

How long does it take for $1,000 to grow into $1,218 at 10% compounded quarterly?

• 6 years

• 2 years

• 8 years

• none of the above

Answer explanation

PV=-1000,FV=1218 , I/Y=2.5, PMT=0, N=?, N=8 quarters, or 2 years

With daily compounding, how long does it take for $100 to grow into $200 at annual
interest rate of 10%?

• 6.93 years

• 2530 years

• Not enough information

• 7.27 years

• None of the above

You are investing $1000 in 3-month Treasury bill (T-bill maturity is 3 months) with quoted
(annual) return of 3%. How much is your investment in 3 months?

• 1030

• 1007.5

• 1000

• 1125.5

• None of the above

Answer explanation

Annual return is 3%, then return over 3-month period is 3%/4=0.75%
FV=1000(1+0.0075)=1007.5

You are investing $1000 in 3-month Treasury bill (T-bill maturity is 3 months) with quoted
(annual) return of 3%. How much is your investment in 3 years?

• 1090

• 1092.72

• 1093.80

• 3895.97

• None of the above

Answer explanation

If you invest in 3-month T bill, your investment increases by 0.75% every 3 months.
There are 4 3-month periods in 1 year, 12 such periods in 3 years.
PV=100, N=3 x4, I=3/4, PMT=0, FV=?