4-1.

You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs

$5000. You plan to put down $1000 and borrow $4000. You will need to make annual payments of $1000 at the end of each year. Show the timeline of the loan from your perspective. How would the timeline differ if you created it from the bank’s perspective?

0

1

2

3

4

5

4000

–1000

–1000

–1000

–1000

–1000

From the bank’s perspective, the timeline is the same except all the signs are reversed.

4-3.

Calculate the future value of $2000 in

a.

Five years at an interest rate of 5% per year.

b.

Ten years at an interest rate of 5% per year.

c.

Five years at an interest rate of 10% per year.

d.

Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

a.

Timeline:

0

1

2

5

2000

FV= ?

FV5 = 2, 000 × 1.055 = 2,552.56

b.

Timeline:

0

1

2

10

2000

FV=?

FV10 = 2, 000 × 1.0510 = 3, 257.79

c.

Timeline:

0

1

2000

2

5

FV= ?

FV5 = 2, 000 × 1.15 = 3, 221.02

d.

Because in the last 5 years you get interest on the interest earned in the first 5 years as well as interest on the original $2,000.

1

4-4.

What is the present value of $10,000 received

a.

Twelve years from today when the interest rate is 4% per year?

b.

Twenty years from today when the interest rate is 8% per year?

c.

Six years from today when the interest rate is 2% per year?

a.

Timeline:

0

1

2

3

12

PV=?

=

PV

b.

10,000

10, 000

= 6, 245.97

12

1.04

Timeline:

0

1

2

3

20

PV=?

=

PV

c.

10,000

10, 000

= 2,145.48

20

1.08

Timeline:

0

1

2

3

4

5

PV=?

=

PV

4-6.

6

10,000

10, 000

= 8, 879.71

6

1.02

Consider the following alternatives:

i.

$100 received in one year

ii.