Question 1

The process of discounting is the opposite of doing what?

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Question 2

Isaac borrowed $3,000 at 10.5% compounded quarterly 3½ years ago. One year ago he made a payment of $1,200. What amount will extinguish the loan today?

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Question 3

Mustafa can receive a $77 dollar discount if he pays his property taxes early. Alternatively, he can pay the full amount of $2,250 when payment is due in 9 months. Which alternative is to his advantage if he can earn 6% compounded monthly on short-term investments? In current dollars, how much is the advantage?

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Question 4

Does a smaller discount rate result in a larger or a smaller present value? Explain.

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Question 5

What single payment 1 year from now would be equivalent to $2500 due in 3 months, and another $2,500 due in 2 years? Money is worth 7% compounded quarterly.

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Question 6

Megan borrowed $1,900 3½ years ago at 7% compounded semi-annually. Two years ago she made a payment of $1,000. What amount is required today to pay off the remaining principal and the accrued interest?

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Question 7

Suppose the future value of $1 after x years is $5. What is the present value of $1, x years before its scheduled payment date? (Assume the same interest rate in both cases.)

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Question 8

Why does $100 due one year from now have less economic value than $100 has today? What do you need to know before you can determine the difference between the economic values of the two payments?

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Question 9

An investment of $2,500 earned interest at 4.5% compounded quarterly for 1½ years, and then 4.0% compounded monthly for two years. How much interest did the investment earn in the 3½ years?

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Question 10

Accurate Accounting obtained a private loan of $25,000 for five years. No payments were required, but the loan accrued interest at the rate of 3% compounded monthly for the first 2½ years and then at 8.25% compounded semi-annually for the remainder of the term. What total amount was required to pay off the loan?

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Question 11

What amount three years ago is equivalent to $4,800 on a date 1½ years from now if money earns 8% compounded semi-annually during the intervening time?

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Question 12

What is the meaning of the term discount rate?

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Question 13

An eight year note for $3,800 with interest at 6% compounded semi-annually was sold after three years and three months to yield the buyer 9% compounded quarterly. What price did the buyer pay?

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Question 14

A four year $8,000 promissory note bearing interest at 6.6% compounded monthly was discounted 21 months after issue to yield 4.8% compounded quarterly. What were the proceeds from the sale of the note?

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Question 15

A $15,000 loan at 5.5% compounded semi-annually is advanced today. Two payments of $4,000 are to be made 1 year and 3 years from now. The balance is to be paid in 5 years. What will the third payment be?

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Question 16

A bond pays $1,000 interest at the end of every year for the next 30 years. What is the current economic value of each of the 15^th and 30^th payments if we discount the payments at: a) 4% compounded semi-annually? b) 8% compounded semi-annually?

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Question 17

Alicia is considering two offers-to-purchase that she has received on a residential building lot she wishes to sell. One is a cash offer of $145,000. The other offer consists of three payments of $49,000-one now, one in six months, and one in twelve months. Which offer has the larger economic value if Alicia can earn 4.4% compounded quarterly on low-risk investments? How much more (in current dollars) is the better offer worth?

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Question 18

Michelle has just received an inheritance from her grandfather's estate. She will be entering college in 3½ years, and wants to immediately purchase three compound-interest investment certificates having the following maturity values and dates: $4,000 at the beginning of her first academic year, $5,000 at the start of her second year, and $6,000 at the beginning of her third year. She can obtain interest rates of 5% compounded semi-annually for any terms between 3 and 5 years, and 5.6% compounded quarterly for terms between 5 and 7 years. What principal amount should she invest in each certificate?

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Question 19

Teresa has three financial obligations to the same person: $2,700 due in 1 year, $1,900 due in 1½ years, and $1,100 due in 3 years. She wishes to settle the obligations with a single payment in 2¼ years, when her inheritance will be released from her mother's estate. What amount should the creditor accept if money can earn 6% compounded quarterly?

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Question 20

A $6,000 loan at 6% compounded quarterly is to be settled by two payments. The first payment is due after 9 months and the second payment, half the amount of the first payment, is due after 1½ years. Determine the size of each payment.

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Quiz 8: Compound Interest: Future Value and Present Value