Fundamental of Finance

Tamil Selvan Chandran

111071-06009-010

U50020

Fundamentals of Finance: Assignment 1 Time Value Money

1. Stanford Lee, who recently sold his Porsche, placed $10,000 in a savings account paying annual compound interest of 6 percents. a. Calculate the amount of money that will have accrued if he leaves the money in the bank for 1, 5 and 15 years. b. Sales of a new finance book were 15,000 copies this year and were expected to increase by 20 percent per year. What are expected sales during each of the next 3 years? Answer: a) FVn = PV (1+i 1 year FV1 = PV (1+i) n =10,000(1+0.06) 1 = $ 10,600 FV2 = 10,000(1+0.06)5 = $ 13,382.26 FV15 = 10,000(1+0.06)15 = $23,965.58

5 years

15 years

b) FVn = PV (1+i 1st year Sales FV1= PV (1+i) n = 15,000 (1+0.20)1 = 18,000 copies

2nd Year Sales FV2= 15,000 (1+0.20)2 = 21,600 copies 3rd Year Sales FV2= 15,000(1+0.20)3 = 25,920 copies

pg. 1

Tamil Selvan Chandran

111071-06009-010

U50020

2. In 10 years you are planning on retiring and buying a house in Kota Bahru, Kelantan. The house you are looking at currently costs RM100,000 and is expected to increase in value each year at a rate of 5 percent. Assuming you can earn 10 percent annually on your investments, how much must you invest at the end of each of the next 10 years to be able to buy your dream house when you retire? Answer: F = PV (1+i = RM100,000 (1+0.05 = RM162,889.46

( ( (

F

= PMT ×

RM162,889.46 = PMT × = PMT ×

= PMT × 15.9374 PMT = RM 10,220.56

3. The Kumar Corporation is planning on issuing bonds that pay no interest but can be converted into $1,000 at maturity, 7 years from their purchase. To price these bonds, competitively with other bonds of equal risk, it is determined that they should yield 10 percent, compounded annually. At what price should the Kumar Corporation sell these bonds?

Answer: FVn = PV (1+i F = PV (1+0.1 , where i = 0.1, n = 7

$1,000 = PV (1.9487) PV= $ 513.18

pg. 2

Tamil Selvan Chandran...