CHAPTER 6

ANSWERS AND SOLUTIONS

1. PV and discount rate Answer: a Diff: E

2. Time value concepts Answer: e Diff: E

3. Time value concepts Answer: d Diff: E

Statements b and c are correct; therefore, statement d is the correct choice. The present value is
smaller if interest is compounded monthly rather than semiannually.

4. Time value concepts Answer: d Diff: E

Statements a and b are correct; therefore, statement d is the correct choice. The nominal interest
rate will be less than the effective rate when the number of periods per year is greater than one.

5. Time value concepts Answer: e Diff: E

As the effective rate is the same, the correct answer must be the one that has the largest amount
of money compounding for the longest time. This would be statement e. The easiest way to see
this is to assume an effective annual rate and then do the calculations:

Say the effective rate is 10 percent. For the semiannual investments, the nominal annual rate will
be 9.76 percent. To calculate the FV for A, enter the following inputs into the calculator: N = 10;
I/YR = 9.76/2 = 4.88; PV = 0; PMT = 50; and then solve for FV = $625.38.

Repeat this for the other 4 investments, using a 10 percent effective annual rate for Investments
D and E, and remembering to use BEGIN mode for Investments B and E. Investment E has the
largest future value ($671.56) using an effective annual rate of 10 percent.

6. Effective annual rate Answer: b Diff: E

The bank account that pays the highest nominal rate with the most frequent rate of compounding
will have the highest EAR. Consequently, statement b is the correct choice.

7. Effective annual rate Answer: d Diff: E

Statement d is correct; the other statements are false. Looking at responses a through d, you
should realize the choice with the greatest frequency of compounding will give you the highest
EAR. This is statement d. Now, compare choices d and e. We know EARd > 7.8%; therefore,
statement d is the correct choice. The EAR of each of the statements is shown below.

EARa = 8.30%; EARb = 8%; EARc = 8.24%; EARd = 8.328%; EARe = 7.8%.

8. Amortization Answer: b Diff: E

Statement b is true; the others are false. The remaining balance after three years will be
$100,000 less the total amount of repaid principal during the first 36 months. On a fixed-rate
mortgage the monthly payment remains the same.

Chapter 6 - Page 53
1. Amortization Answer: e Diff: E

Statements b and c are correct; therefore, statement e is the correct choice. Monthly payments will
remain the same over the life of the loan.

2. Quarterly compounding Answer: e Diff: E

If the nominal rate is 8 percent and there is quarterly compounding, the periodic rate must be
8%/4 = 2%. The effective rate will be greater than the nominal rate; it will be 8.24 percent. So the
correct answer is statement e.

3. Annuities Answer: c Diff: M

By definition, an annuity due is received at the beginning of the year while an ordinary annuity is
received at the end of the year. Because the payments are received earlier, both the present and
future values of the annuity due are greater than those of the ordinary annuity.

4. Time value concepts Answer: e Diff: M

If the interest rate were higher, the payments would all be higher, and all of the increase would be
attributable to interest. So, the proportion of each payment that represents interest would be higher.
Note that statement b is false because interest during Year 1 would be the interest rate times the
beginning balance, which is $10,000. With the same interest rate and the same beginning balance, the
Year 1 interest charge will be the same, regardless of whether the loan is amortized over 5 or 10
years.

5. Time value concepts Answer: e Diff: M

6. Time value concepts Answer: c Diff: M

Statement c is correct; the other statements are false. The effective rate of the investment in
statement a is 10.25%. The present value of the annuity due is greater than the present value of
the ordinary annuity.

7. Time value concepts Answer: e Diff: T

8. FV of a sum Answer: b Diff: E

Time Line:
0 2%
1 2 3 4 5 6 Qt r s
| | | | | | |
- 1, 000 FV = ?

Financial calculator solution:

Inputs: N = 6; I = 2; PV = -1000; PMT = 0. Output: FV = $1,126.16  $1,126.

Chapter 6 - Page 54
9. FV of an annuity Answer: e Diff: E

Time Line:
0 15%
1 2 3 4 5 Ye ar s
| | | | | |
- 200 - 200 - 200 - 200 - 200
FV = ?
Financial calculator solution:
Inputs: N = 5; I = 15; PV = 0; PMT = -200. Output: FV = $1,348.48.

10. FV of an annuity Answer: a Diff: E N

The payments start next year, so the calculator should be in END mode. Enter the following data
in your calculator:
N = 42; I/Yr = 12; PV = -1000; PMT = -2000. Then solve for FV = $2,045,442.

11. FV of annuity due Answer: d Diff: E N

Since payments begin today and occur every year on Janet’s birthday, the calculator must be set to
BEGIN mode. Now, we just find the future value of these payments by entering the following data
into your calculator:
BEG N = 42; I = 10; PV = 10000; PMT = 1000; and then solve for FV = $1,139,037.68.

12. PV of an annuity Answer: a Diff: E

Time Line:
0 15%
1 2 3 4 5 Ye ar s
| | | | | |
PV = ? - 200 - 200 - 200 - 200 - 200

Financial calculator solution:

Inputs: N = 5; I = 15; PMT = -200; FV = 0. Output: PV = $670.43.

13. PV of a perpetuity Answer: c Diff: E

V = PMT/i = $1,000/0.15 = $6,666.67.

14. PV of an uneven CF stream Answer: b Diff: E

NPV = $10,000/1.08 + $25,000/(1.08)2 + $50,000/(1.08)3 + $35,000/(1.08)4

= $9,259.26 + $21,433.47 + $39,691.61 + $25,726.04
= $96,110.38  $96,110.

Financial calculator solution:

Using cash flows

Chapter 6 - Page 55
 Inputs: CF0 = 0; CF1 = 10000; CF2 = 25000; CF3 = 50000; CF4 = 35000; I = 8.
Output: NPV = $96,110.39  $96,110.

15. PV of an uneven CF stream Answer: c Diff: E

Time Line:
0 14%
1 2 3 4 5 6 7 8 9 Ye ar s
| | | | | | | | | |
PV = ? 2, 000 2, 000 2, 000 2, 000 2, 000 3, 000 3, 000 3, 000 4, 000

Financial calculator solution:

Using cash flows
Inputs: CF0 = 0; CF1 = 2000; Nj = 5; CF2 = 3000; Nj = 3; CF3 = 4000; I = 14.
Output: NPV = $11,713.54  $11,714.

16. Required annuity payments Answer: b Diff: E

Time line:
0 10%
1 2 3 4 5 Ye ar s
| | | | | |
PV = 1, 000 P MT = ? P MT P MT P MT P MT

Financial calculator solution:

Inputs: N = 5; I = 10; PV = -1000; FV = 0. Output: PMT = $263.80.

17. Quarterly compounding Answer: a Diff: E

Time line:
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Qt r s
1%
| | | | | | | | | | | | | | | | | | | | |
- 100 FV = ?

Financial calculator solution:

Inputs: N = 20; I = 1; PV = -100; PMT = 0. Output: FV = $122.02.

18. Growth rate Answer: d Diff: E

Time Line:
1958 i = ?
1959 1988
| |    |
1, 800 13, 700

Financial calculator solution:

Inputs: N = 30; PV = -1800; PMT = 0; FV = 13700. Output: I = 7.0%.

19. Effect of inflation Answer: c Diff: E

Time Line:
0 4%
1 n = ? Ye ar s
| |    |
- 1. 00 0. 50

Chapter 6 - Page 56
 Financial calculator solution:
Inputs: I = 4; PV = -1; PMT = 0; FV = 0.50.
Output: N = -17.67  18 years.

20. Interest rate Answer: b Diff: E

Time Line:
0 i = ?
1 2 3 4 5 Ye ar s
| | | | | |
10, 000 - 2, 504. 56 - 2, 504. 56 - 2, 504. 56 - 2, 504. 56 - 2, 504. 56

Financial calculator solution:

Inputs: N = 5; PV = 10000; PMT = -2504.56; FV = 0. Output: I = 8%.

21. Effective annual rate Answer: c Diff: E

Bank A: 8%, monthly.

m
 k 
EARA = 1  Nom
  1
 m 
12
 0 . 08 
= 1    1 = 8.30%.
 12 

Bank B: 9%, interest due at end of year

EARB = 9%.

9.00% - 8.30% = 0.70%.

22. Effective annual rate Answer: b Diff: E

Use the formula for calculating effective rates from nominal rates as follows:
EAR = (1 + 0.18/12)12 - l = 0.1956 or 19.56%.

23. Effective annual rate Answer: b Diff: E

Convert each of the alternatives to an effective annual rate (EAR) for comparison. This problem
can be solved with either the EAR formula or a financial calculator.

a. EAR = 10.38%.
b. EAR = 10.47%.
c. EAR = 10.20%.
d. EAR = 10.25%.
e. EAR = 10.07%.

Therefore, the highest effective return is choice b.

24. Effective annual rate Answer: c Diff: E

Your proposal:
EAR1 = $120/$1,000
EAR1 = 12%.

Chapter 6 - Page 57
 Your friend’s proposal:
Interest is being paid each month ($10/$1,000 = 1% per month), so it compounds, and the EAR is
higher than kNom = 12%:
12
 0.12 
EAR2 = 1 +  - 1 = 12.68%.
 12 
Difference = 12.68% - 12.00% = 0.68%.

You could also visualize your friend’s proposal in a time line format:
0 1 2 11 12
i = ?
| | |    | |
1, 000 - 10 - 10 - 10 - 1, 010

Insert those cash flows in the cash flow register of a calculator and solve for IRR. The answer is 1%,
but this is a monthly rate. The nominal rate is 12(1%) = 12%, which converts to an EAR of 12.68% as
follows:
Input into a financial calculator the following:
P/YR = 12; NOM% = 12; and then solve for EFF% = 12.68%.

25. Effective annual rate Answer: b Diff: E

Enter the following inputs into the calculator: N = 10; PV = -35000;

PMT = 0; FV = 100000; and then solve for I = 11.069%  11.07%.

26. Effective annual rate Answer: a Diff: E

Convert each of the alternatives to an effective annual rate (EAR) for comparison. This problem
can be solved with either the EAR formula or a financial calculator.

a. EAR = 10.2736%.
b. EAR = 10.1846%.
c. EAR = 10.2000%.
d. EAR = 10.2500%.
e. EAR = 10.0339%.

Therefore, the highest effective return is choice a.

27. Effective annual rate Answer: b Diff: E

Convert each of the alternatives to an effective annual rate (EAR) for comparison. This problem
can be solved with either the EAR formula or a financial calculator.

Chapter 6 - Page 58
 a. EAR = 9.20%.
b. EAR = 9.31%.
c. EAR = 9.20%.
d. EAR = 9.27%.
e. EAR = 9.20%.

Thus, the highest effective return is choice b.

28. Nominal and effective rates Answer: b Diff: E

1st investment: Enter the following:

NOM% = 9; P/YR = 2; and then solve for EFF% = 9.2025%.

2nd investment: Enter the following:

EFF% = 9.2025; P/YR = 4; and then solve for NOM% = 8.90%.

29. Time for a sum to double Answer: d Diff: E

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

30. Time for lump sum to grow Answer: e Diff: E N

Enter the data given in your financial calculator:

I = 10; PV = -300000; PMT = 0; FV = 1000000. Then solve for N = 12.63 years.

31. Time value of money and retirement Answer: b Diff: E

Step 1: Find the number of years it will take for each $150,000 investment to grow to
$1,000,000.
BRUCE: I/YR = 5; PV = -150000; PMT = 0; FV = 1000000; and then solve for N = 38.88.
BRENDA: I/YR = 10; PV = -150000; PMT = 0; FV = 1000000; and then solve for N =
19.90.

Step 2: Calculate the difference in the length of time for the accounts to reach $1 million:
Bruce will be able to retire in 38.88 years, or 38.88 – 19.90 = 19.0 years after Brenda
does.

32. Monthly loan payments Answer: c Diff: E

First, find the monthly interest rate = 0.10/12 = 0.8333%/month. Now, enter in your calculator N =
60; I/YR = 0.8333; PV = -13000; FV = 0; and then solve for PMT = $276.21.

33. Remaining loan balance Answer: a Diff: E

Step 1: Solve for the monthly payment:

Enter the following input data in the calculator:
N = 60; I = 12/12 = 1; PV = -15000; FV = 0; and then solve for PMT = $333.6667.

Step 2: Determine the loan balance remaining after the 30th payment:
1 INPUT 30  AMORT

Chapter 6 - Page 59
 = displays Int: $3,621.1746
= displays Prin: $6,388.8264
= displays Bal: $8,611.1736.
Therefore, the balance will be $8,611.17.

34. Remaining loan balance Answer: b Diff: E

Find the payment of the mortgage first. N = 48; I/YR = 12/12 = 1; PV = 20000; FV = 0; and then
solve for PMT = $526.68.

Use the calculator’s amortization feature to find the remaining loan balance:
3 years = 3  12 = 36 payments.
1 INPUT 36  AMORT
= displays Int: $4,888.07
= displays Prin: $14,072.41
= displays Bal: $5,927.59.

35. Remaining mortgage balance Answer: c Diff: E

First, find the payment: Enter N = 360; I/YR = 9/12 = 0.75; PV =

-250000; FV = 0; and then solve for PMT = $2,011.56.
Use the calculator’s amortization feature to find the remaining mortgage balance:
5 years = 5  12 = 60 payments.
1 INPUT 60  AMORT
= displays Int: $110,393.67
= displays Prin: $10,299.93
= displays Bal: $239,700.07.

36. Remaining mortgage balance Answer: d Diff: E

Solve for the monthly payment as follows:

N = 30  12 = 360; I = 8/12 = 0.667; PV = -150000; FV = 0; and then solve for PMT =
$1,100.65/month.

Use the calculator’s amortization feature to find the remaining principal balance:
3  12 = 36 payments
1 INPUT 36  AMORT
= displays Int: $35,543.52
= displays Prin: $4,079.88
= displays Bal: $145,920.12.

37. Remaining mortgage balance Answer: d Diff: E

Solve for the monthly payment as follows:

N = 12  15 = 180; I = 8.5/12 = 0.7083; PV = -160000; FV = 0; PMT = $1,575.58.

Use the calculator’s amortization feature to find the remaining principal balance:
1 INPUT 36  AMORT
= displays Int: $38,658.34
= displays Prin: $18,062.54
= displays Bal: $141,937.46.

Chapter 6 - Page 60
1. Remaining mortgage balance Answer: c Diff: E

Step 1: Calculate the monthly mortgage payment:

N = 360; I = 7/12 = 0.5833; PV = -145000; FV = 0; and then solve for PMT =
$964.6886.

Step 2: Develop the amortization schedule using the calculator’s amortization feature:
5  12 = 60 payments
1 INPUT 60  AMORT
= displays Int: $49,372.1225
= displays Prin: $8,509.1935
= displays Bal: $136,490.8065  $136,491.

2. Remaining mortgage balance Answer: b Diff: E

Step 1: Calculate the mortgage’s monthly payment:

Enter the following data in the calculator:
N = 360; I = 7.45/12 = 0.6208; PV = -175000; FV = 0; and then solve for PMT =
$1,217.64.

Step 2: Calculate the remaining balance on the mortgage after 60 monthly payments by
using the calculator’s amortization feature:
1 INPUT 60  AMORT
= displays Int: $63,556.53
= displays Prin: $9,501.84
= displays Bal: $165,498.16  $165,498.

3. Amortization Answer: c Diff: E

Step 1: Determine the monthly payment of the mortgage:

Enter the following inputs in the calculator:
N = 360; I = 8/12 = 0.6667; PV = -165000; FV = 0; and then solve for PMT =
$1,210.7115.

Step 2: Determine the amount of interest during the first 3 years of the mortgage by using
the calculator’s amortization feature:
1 INPUT 36  AMORT
= displays Int: $39,097.8616.

4. FV under monthly compounding Answer: a Diff: E N

Step 1: Make sure the interest rate matches the payment period. The payments are monthly,
so you need to calculate the monthly periodic rate.
Periodic rate = 8%/12 = 0.667%.

Step 2: Enter the numbers given into your financial calculator:

N = 30; I/Yr = 8/12 = 0.667; PV = 0; PMT = -200. Then solve for FV = $6,617.77.

5. Monthly vs. quarterly compounding Answer: c Diff: M

There are several ways to do this, but the easiest is with the calculator:

Chapter 6 - Page 61
 Step 1: Find the effective rate on the account with monthly compounding:
NOM% = 5; P/YR = 12; and then solve for EFF% = 5.1162%.

Step 2: Translate the effective rate to a nominal rate based on quarterly compounding:
EFF% = 5.1162; P/YR = 4; and then solve for NOM% = 5.0209%  5.02%.

6. Present value Answer: c Diff: M N

Use your financial calculator to determine each security’s present value, and then choose the one
with the largest present value.

a. Enter the following inputs in your calculator:

N = 5; I = 8; PMT = 1000; FV = 0; and then solve for PV = $3,992.71.

b. Enter the following inputs in your calculator:

N = 5; I = 8; PMT = 0; FV = 7000; and then solve for PV = $4,764.08.

c. P = PMT/I = $800/0.08 = $10,000.

d. Enter the following inputs in your calculator:

N = 7; I = 8; PMT = 0; FV = 8500; and then solve for PV = $4,959.67.

e. Enter the following inputs in your calculator:

CF0 = 0; CF1 = 1000; CF2 = 2000; CF3 = 3000; I = 8; and then solve for NPV = $5,022.10.

The preferred stock issue, statement c, has the largest present value among these choices.

7. PV under monthly compounding Answer: b Diff: M

Start by calculating the effective rate on the second security:

P/YR = 12; NOM% = 10; and then solve for EFF% = 10.4713%.
Then, convert this effective rate to a semiannual rate:
EFF% = 10.4713; P/YR = 2; NOM% = 10.2107%.
Now, calculate the value of the first security as follows:
N = 10  2 = 20; I = 10.2107/2 = 5.1054; PMT = 500; FV = 0; and then solve for PV = -$6,175.82.

8. PV under non-annual compounding Answer: c Diff: M

First, find the effective annual rate for a nominal rate of 12% with quarterly compounding: P/YR =
4; NOM% = 12; and EFF% = 12.55%. In order to discount the cash flows properly, it is necessary to
find the nominal rate with semiannual compounding that corresponds to the effective rate

Chapter 6 - Page 62
 calculated above. Convert the effective rate to a semiannual nominal rate as P/YR = 2; EFF% =
12.55; and NOM% = 12.18%. Finally, find the PV as N = 2  3 = 6; I = 12.18/2 = 6.09; PMT = 500; FV
= 0; and then solve for PV = -$2,451.73.

9. PV of an annuity Answer: a Diff: M

Time Line:
0 7%
1 2 3 n = ? Ye ar s
| | | | |
PVLi f e t i me = 100 - - - -
10 10 10 10 10
P V An n u a l = 100

Financial calculator solution:

Inputs: I = 7; PV = -90; PMT = 10; FV = 0. Output: N = 14.695  15 years.

10. FV of an annuity Answer: e Diff: M

Step 1: Determine the effective annual rate:

The nominal rate is 6 percent, but we need the effective annual rate.
Using the calculator, input the following data:
NOM% = 6; P/YR = 365; and then solve for EFF% = 6.1831%.

Step 2: Determine the future value of the annuity:

N = 3; I/YR = 6.1831; PV = -500; PMT = -1000; and then solve for FV = $3,787.92 
$3,788.

11. FV of an annuity Answer: c Diff: M

To calculate the solution to this problem, change your calculator to BEGIN mode. Then enter N =
35; I = 10; PV = 0; PMT = 3000; and then solve for FV = $894,380.4160. Add the last payment of
$3,000, and the value at t = 35 is $897,380.4160  $897,380.

12. FV of an annuity Answer: d Diff: M N

First, find the present values today of the two withdrawals to occur on the 25th and 30th birthdays
(in the 5th and 10th year of the problem, respectively).

PV today of $5,000 withdrawal five years from now:

N = 5; I = 12; PMT = 0; FV = 5000; and then solve for PV = -$2,837.13.

PV today of $10,000 withdrawal 10 years from now:

N = 10; I = 12; PMT = 0; FV = 10000; and then solve for PV = -$3,219.73.

Now, we subtract the PV of these withdrawals from our initial investment:

$5,000.00 - $2,837.13 - $3,219.73 = $-1,056.86.

Finally, we have our simple TVM setup with N, I, PV, and PMT, solving for FV:
N = 45; I = 12; PV = -1056.86; PMT = 500; and then solve for FV = $505,803.08  $505,803.

13. FV of annuity due Answer: d Diff: M

Chapter 6 - Page 63
 There are a few ways to do this. One way is shown below.
To get the value at t = 5 of the first 5 payments:
BEGIN mode, N = 5; I = 11; PV = 0; PMT = -3000; and then solve for FV = $20,738.58.

Now add on to this the last payment that occurs at t = 5.

$20,738.58 + $3,000 = $23,738.58  $23,739.

14. FV of annuity due Answer: e Diff: M

Step 1: Calculate the value at t = 45 of the first 44 annuity contributions:

Enter the following inputs in the calculator:
BEGIN mode, N = 44; I = 10; PV = 0; PMT = -2000; and then solve for FV =
$1,435,809.67.

Step 2: Now add on to the FV (calculated in Step 1) the last contribution that occurs at t = 45:
$1,435,809.67 + $2,000.00 = $1,437,809.67.

15. FV of a sum Answer: d Diff: M

T i me Li ne:
0 1 2 3 4 40 6 - mo n t h s
3%
| | | | |    | Pe r i o d s
100 - 100 FV = ?

Step 1: Solve for amount on deposit at the end of 6 months:

 0 . 06 
$ 100 1    $ 100  $ 3 . 00 .
 2 

Step 2: Calculate the ending balance 20 years after the initial deposit of $100 was made:
Inputs: N = 39; I = 3; PV = -3.00; PMT = 0. Output: FV = $9.50.

16. FV under monthly compounding Answer: e Diff: M

Financial calculator solution:

N = 3  12 = 36; I = 6/12 = 0.5; PV = -1000; PMT = 0; and then solve for FV = $1,196.68.

17. FV under monthly compounding Answer: d Diff: M

Chapter 6 - Page 64
 Step 1: Calculate the FV at t = 3 of the first deposit.
Enter N = 36; I/YR = 12/12 = 1; PV = -10000; PMT = 0; and then solve for FV =
$14,308.

Step 2: Calculate the FV at t = 3 of the second deposit.

Enter N = 24; I/YR = 12/12 = 1; PV = -10000; PMT = 0; and then solve for FV =
$12,697.

Step 3: Calculate the FV at t = 3 of the third deposit.

Enter N = 12; I/YR = 12/12 = 1; PV = -20000; PMT = 0; and then solve for FV =
$22,537.

Step 4: The sum of the future values gives you the answer, $49,542.

18. FV under daily compounding Answer: a Diff: M

Solve for FV as N = 132; I = 4/365 = 0.0110; PV = -2000; PMT = 0; and then solve for FV =
$2,029.14.

19. FV under daily compounding Answer: d Diff: M N

Step 1: Find the effective rate by entering the following data in your calculator:
I = 6; P/Yr = 365; and then solve for EFF = 6.1831%.

Step 2: Switch back to P/Yr = 1 and find the future value of the deposit by entering the
following data in your calculator:
N = 5; I = 6.1831; PV = -1000; PMT = 0; and then solve for FV = $1,349.82.
20. FV under non-annual compounding Answer: d Diff: M

First, find the FV of Josh’s savings as: N = 2  26 = 52; I = 10/26 = 0.3846; PV = 0; PMT = -100; and FV
= $5,744.29.

John’s savings will have two components, a lump sum contribution of $1,500 and his monthly
contributions. The FV of his regular savings is: N = 2  12 = 24; I = 10/12 = 0.8333; PV = 0; PMT = -
150; and FV = $3,967.04. The FV of his previous savings is: N = 24; I = 0.8333; PV = -1500; PMT = 0;
and FV = $1,830.59.

Summing the components of John’s savings yields $5,797.63, which is greater than Josh’s total
savings. Thus, the most expensive car purchased costs $5,797.63.

21. FV under quarterly compounding Answer: c Diff: M

The effective rate is given by:

NOM% = 8; P/YR = 4; and then solve for EFF% = 8.2432%.
The nominal rate on a semiannual basis is given by:
EFF% = 8.2432; P/YR = 2; and then solve for NOM% = 8.08%.
The future value is given by:
N = 2.5  2 = 5; I = 8.08/2 = 4.04; PV = 0; PMT = -100; and then solve for FV = $542.07.

22. FV under quarterly compounding Answer: d Diff: M

Chapter 6 - Page 65
 There are several ways of doing this. One way is:
First, find the periodic (quarterly) rate is 7%/4 = 1.75%.

Next, find the future value of each amount put in the account:
N = 12; I = 1.75; PV = -1000; PMT = 0; and then solve for FV = $1,231.4393. N = 8; I = 1.75; PV = -
2000; PMT = 0; and then solve for FV = $2,297.7636. N = 4; I = 1.75; PV = -3000; PMT = 0; and
then solve for FV = $3,215.5771.

Add up the future values for the answer: $6,744.78.

23. Non-annual compounding Answer: c Diff: M N

Step 1: Determine Bank A’s EAR:

EFF% = (1 + kNOM/m)m – 1
= (1 + 9%/4)4 – 1
= (1.0225)4 - 1
= 1.09308 – 1
= 9.308%.

Step 2: Determine Bank B’s nominal annual rate of return:

9.308% = (1 + kNOM/12)12 – 1
1.09308 = (1 + kNOM/12)12
1.00744 = 1 + kNOM/12
0.00744 = kNOM/12
0.08933 = kNOM.

Alternatively, with a financial calculator:

Step 1: NOM% = 9; P/YR = 4; and then solve for EFF% = 9.30833%.

Step 2: EFF% = 9.30833; P/YR = 12; and then solve for NOM% = 8.933%.

After you finish this problem, remember to change your calculator setting back to 1 P/YR.

24. FV of an uneven CF stream Answer: e Diff: M

First, calculate the payment amounts:

Chapter 6 - Page 66
 PMT0 = $5000, PMT1 = $5500, PMT2 = $6050, PMT3 = $6655, PMT4 = $7320.50. Then, find the
future value of each payment at t = 5: For PMT0, N = 5;
I = 14; PV = -5000; PMT = 0; thus, FV = $9,627.0729. Similarly, for PMT1, FV = $9,289.2809, for PMT2,
FV = $8,963.3412, for PMT3, FV = $8,648.8380, and for PMT4, FV = $8,345.3700. Finally, summing
the future values of the respective payments will give the balance in the account at t = 5 or
$44,873.90.

25. FV of an uneven CF stream Answer: d Diff: M

Time Line:
0 8%
1 5 6 10 Ye ar s
| |    | |    |
5, 000 1, 000 1, 000 2, 000 2, 000
FV = ?

Financial calculator solution:

Calculate PV of the cash flows, then bring them forward to FV using the interest rate.
Inputs: CF0 = 5000; CF1 = 1000; Nj = 5; CF2 = 2000; Nj = 5; I = 8.
Output: NPV = $14,427.45.
Inputs: N = 10; I = 8; PV = -14427.45; PMT = 0.
Output: FV = $31,147.79  $31,148.

26. FV of an uneven CF stream Answer: c Diff: M N

The easiest way to find the solution to this problem is to find the PV of all her contributions today,
and then find the FV of that PV 10 years from now.

Step 1: Calculate the PV of all the deposits today:

CF0 = 10000; CF1 = 20000; CF2 = 50000; I = 6; and then solve for NPV =
$73,367.74653.

Step 2: Calculate the FV 10 years from now of the PV of the deposits:

N = 10; I = 6; PV = -73367.74653; PMT = 0; and then solve for FV = $131,390.46.

27. PV of an uneven CF stream Answer: a Diff: M

Time Line:
0 12%
1 2 3 4 5 6 Pe r i o d s
| | | | | | |
0 1 2, 000 2, 000 2, 000 0 - 2, 000
PV = ?

Financial calculator solution:

Using cash flows
Inputs: CF0 = 0; CF1 = 1; CF2 = 2000; Nj = 3; CF3 = 0; CF4 = -2000; I = 12.
Output: NPV = $3,276.615  $3,277.

28. PV of uncertain cash flows Answer: e Diff: M

Time Line:

Chapter 6 - Page 67
 0 1 2 3 Ye ar s
8%
| | | |
0 E ( CF 1) E ( CF 2) E ( CF 3)
Calculate expected cash flows
E(CF1) = (0.30)($300) + (0.40)($500) + (0.30)($700) = $500.
E(CF2) = (0.15)($100) + (0.35)($200) + (0.35)($600) + (0.15)($900)=$430.
E(CF3) = (0.25)($200) + (0.75)($800) = $650.

Financial calculator solution:

Using cash flows
Inputs: CF0 = 0; CF1 = 500; CF2 = 430; CF3 = 650; I = 8.
Output: NPV = $1,347.61.

29. Value of missing cash flow Answer: d Diff: M

Financial calculator solution:

Enter the first 4 cash flows, enter I = 15, and solve for NPV = -$58.945. The future value of $58.945
will be the required cash flow.
N = 4; I/YR = 15; PV = -58.945; PMT = 0; and then solve for FV = $103.10.

30. Value of missing cash flow Answer: c Diff: M

Find the present value of each of the cash flows:

PV of CF1 = $325/1.12 = $290.18. PV of CF2 = $400/(1.12)2 = $318.88.
PV of CF3 = $550/(1.12)3 = $391.48. PV of CF5 = $750/(1.12)5 = $425.57. PV of CF6 = $800/(1.12)6
= $405.30. Summing these values you obtain $1,831.41. The present value of CF4 must then be
$2,566.70 - $1,831.41 = $735.29. The value of CF4 is ($735.29)(1.12)4 = $1,157.

Financial calculator solution:

Using cash flows
Inputs: CF0 = -2566.70; CF1 = 325; CF2 = 400; CF3 = 550; CF4 = 0; CF5 = 750; CF6 = 800; I = 12.
Output: NPV = -735.29.

The value of CF4 is ($735.29)(1.12)4 = $1,157.

31. Value of missing payments Answer: d Diff: M

Find the FV of the price and the first three cash flows at t = 3.
To do this first find the present value of them.
CF0 = -5544.87; CF1 = 100; CF2 = 500; CF3 = 750; I = 9; and then solve for NPV = -$4,453.15.

Find the FV of this present value.

N = 3; I = 9; PV = -4453.15; PMT = 0; FV = $5,766.96.

Now solve for X.

N = 17; I = 9; PV = -5766.96; FV = 0; and then solve for PMT = $675.

32. Value of missing payments Answer: c Diff: M

Chapter 6 - Page 68
 There are several different ways of doing this. One way is:
Find the future value of the first three years of the investment at Year 3.
N = 3; I = 7.3; PV = -24307.85; PMT = 2000; FV = $23,580.68.

Find the value of the final $10,000 at Year 3.

N = 7; I = 7.3; PMT = 0; FV = 10000; PV = -$6,106.63.

Add the two Year 3 values (remember to keep the signs right).
$23,580.68 + -$6,106.63 = $17,474.05.

Now solve for the PMTs over years 4 through 9 (6 years) that have a PV of $17,474.05.
N = 6; I = 7.3; PV = -17474.05; FV = 0; PMT = $3,700.00.

33. Value of missing payments Answer: d Diff: M

The project’s cost should be the PV of the future cash flows. Use the cash flow key to find the PV
of the first 3 years of cash flows.

CF0 = 0; CF1 = 100; CF2 = 200; CF3 = 300; I/YR = 10; NPV = $481.59.

The PV of the cash flows for Years 4-20 must be:

$3,000 - $481.59 = $2,518.41.

Take this PV amount forward to Time 3:

N = 3; I/YR = 10; PV = -2518.41; PMT = 0; and then solve for FV = $3,352.00.

This amount is also the present value of the 17-year annuity.

N = 17; I/YR = 10; PV = -3352; FV = 0; and then solve for PMT = $417.87.

34. Amortization Answer: c Diff: M

Time Line:
0 1 2 3 30 Ye ar s
12%
| | | |    |
200, 000 P MT = ? P MT P MT P MT

Financial calculator solution:

Inputs: N = 30; I = 12; PV = -200000; FV = 0.
Output: PMT = $24,828.73  $24,829.

35. Amortization Answer: a Diff: M

Given: Loan value = $100,000; Repayment period = 12 months; Monthly payment = $9,456.

Chapter 6 - Page 69
 N = 12; PV = -100000; PMT = 9456; FV = 0; and then solve for I/YR = 2.00%  12 = 24.00%.

To find the amount of principal paid in the third month (or period), use the calculator’s
amortization feature.
3 INPUT 3  AMORT
= displays Int: $1,698.84
= displays Prin: $7,757.16
= displays Bal: $77,181.86.

36. Amortization Answer: c Diff: M

Enter the following inputs in the calculator:

N = 30  12 = 360; I = 9/12 = 0.75; PV = -90000; FV = 0; PMT = $724.16.

Total payments in the first 2 years are $724.16  24 = $17,379.85.

Use the calculator’s amortization feature:

12  2 = 24 payments
1 INPUT 24  AMORT
= displays Int: $16,092.44.

Percentage of first two years that is interest is:

$16,092.44/$17,379.85 = 0.9259 = 92.59%.

37. Amortization Answer: e Diff: M

Step 1: Calculate the monthly mortgage payment:

Enter the following inputs in the calculator:
N = 360; I = 7.25/12 = 0.604167; PV = -135000; FV = 0; and then solve for PMT =
$920.9380.

Step 2: Obtain the amortization schedule for the fourth year (months 37-48) by using the
calculator’s amortization feature:
37 INPUT 48  AMORT
= displays Int: $9,428.2512
= displays Prin: $1,623.0048.

Step 3: Calculate the percentage of payments in the fourth year that will go towards the
repayment of principal:
$1,623.0048/($920.938  12) = 0.1469 = 14.69%.

38. Amortization Answer: b Diff: M

Chapter 6 - Page 70
 Step 1: Determine the monthly mortgage payment:
Enter the following data in the calculator:
N = 360; I = 7/12 = 0.5833; PV = -125000; FV = 0; and then solve for PMT =
$831.6281.

Step 2: Determine the total principal paid by using the calculator’s amortization feature:
1 INPUT 36  AMORT
= displays Int: $25,847.316
= displays Prin: $4,091.295
= displays Bal: $120,908.705.

Step 3: Calculate the portion of mortgage payments that has gone towards repayment of
principal:
Total amount of mortgage payments made in the first 3 years = $831.6281  36 =
$29,938.612. Repayment of principal portion: $4,091.295/$29,938.612 = 13.67%.

39. Amortization Answer: b Diff: M N

Step 1: Calculate the monthly mortgage payment by entering the following inputs in your
calculator:
N = 180; I = 8/12 = 0.6667; PV = -250000; FV = 0; and then solve for PMT =
$2,389.1302.

Step 2: Find the annual mortgage payments.

Annual = $2,389.1302  12 = $28,669.5625.

Step 3: Find the amount that went towards principal in the 5th year with your calculator’s
amortization feature:
49 INPUT 60  AMORT
= displays Int: $16,295.9719
= displays Prin: $12,373.5905
= displays Bal: $196,915.6510.

Step 4: The portion of the mortgage payments that goes towards repayment of principal is:
$12,373.5905/$28,669.5625 = 43.16%.

40. Remaining mortgage balance Answer: b Diff: M N

Step 1: Find the monthly mortgage payment by entering the following inputs in your
calculator:
N = 360; I/Yr = 8/12 = 0.667; PV = -300000; FV = 0; and then solve for PMT =
$2,201.29.

Step 2: Calculate the remaining principal balance after 5 years by using your financial
calculator’s amortization feature.
60 INPUT  AMORT
= displays Int: $1,903.38
= displays Prin: $297.91
= displays Bal: $285,209.57.

41. Remaining loan balance Answer: d Diff: M

Step 1: Calculate the common monthly payment using the information you know about

Chapter 6 - Page 71
 Jamie’s loan:
N = 48; I = 12/12 = 1; PV = -15000; FV = 0; and then solve for PMT = $395.0075.

Step 2: Calculate how much Jake’s car cost using the information you know about his loan
and the monthly payment solved in Step 1:
N = 60; I = 12/12 = 1; PMT = -395.0075; FV = 0; and then solve for PV = $17,757.5787.

Step 3: Calculate the balance on Jake’s loan at the end of 48 months by using the
calculator’s amortization feature:
1 INPUT 48  AMORT
= displays Int: $5,648.62
= displays Prin: $13,311.74
= displays Bal: $4,445.84.
42. Effective annual rate Answer: b Diff: M

Time Line:
i = ?
0 B
1 2 3 4 10 Ye ar s
i A = 0%
| | | | |    |
PV = 3, 755. 50 P MT P MT P MT P MT P MT
P MT B = P MT A = 375. 55 F V30 = 5, 440. 22

Financial calculator solution:

Calculate the PMT of the annuity
Inputs: N = 10; I = 0; PV = -3755.50; FV = 0. Output: PMT = $375.55.
Calculate the effective annual interest rate
Inputs: N = 10; PV = 0; PMT = -375.55; FV = 5440.22.
Output: I = 7.999  8.0%.

43. Effective annual rate Answer: d Diff: M

4
 0.10 
EARQtr = 1 +  - 1 = 10.38%.
 4 
365
 0.09 
EARDly = 1 +  - 1 = 9.42%.
 365 

Difference = 10.38% - 9.42% = 0.96%.

44. Effective annual rate Answer: e Diff: M

Given: Loan value = $12,000; Loan term = 10 years (120 months); Monthly payment = $150.

N = 120; PV = -12000; PMT = 150; FV = 0; and then solve for I/YR = 0.7241  12 = 8.6892%.
However, this is a nominal rate. To find the effective rate, enter the following:
NOM% = 8.6892; P/YR = 12; and then solve for EFF% = 9.0438%.

45. Nominal vs. effective annual rate Answer: b Diff: M N

This is a question that requires you to be able to use your calculator to find effective and nominal
rates.

Chapter 6 - Page 72
 Change to 4  P/YR;  NOM% = 7.5; and then solve for  EFF% = 7.7136%.

This is the effective rate of the Gilhart investment. Remember, that the effective rates on the two
securities are equal. So, we can solve for the nominal annual return of the Olsen security.

Change to 12  P/YR;  EFF% = 7.7136; and then solve for  NOM% = 7.4536%  7.45%.

46. Effective annual rate and annuities Answer: d Diff: M

Step 1: Find the effective annual rate:

Enter the following input data in the calculator:
NOM% = 9; P/YR = 12; and then solve for EFF% = 9.3807%.

Step 2: Calculate the FV of the $5,000 annuity at the end of 10 years:

Now, put the calculator in End mode, switch back to 1 P/Yr, and enter the following
input data in the calculator:
N = 10; I = 9.3807; PV = 0; PMT = -5000; and then solve for FV = $77,358.80 
$77,359.

47. Value of a perpetuity Answer: c Diff: M

Time Line:
0 1 2 20 Ye ar s
k = ? = 8%
| | |    |
P MT = 1, 250 1, 250 1, 250 1, 250

PMT
Solve for required return, k. We know Vp = , thus,
k
PMT $1,250
k= = = 8%.
Vp $15,625

Financial calculator solution:

Inputs: N = 20; I = 8; PMT = -1250; FV = 0.
Output: PV = $12,272.68  $12,273.

48. EAR and FV of an annuity Answer: b Diff: M

0 12 24 36 48 60 Mo s .
8. 30%
| | | | | |
0 5, 000 5, 000 5, 000 5, 000 5, 000
FV = ?
Step 1: Because the interest is compounded monthly, but payments are made annually, you
need to find the interest rate for the payment period (the effective rate for one year).
Enter the following input data in your calculator:
NOM% = 8; P/YR = 12; EFF% = 8.30%.
Now use this rate as the interest rate. Remember to switch back P/YR = 1.

Chapter 6 - Page 73
 Step 2: Find the FV of the annuity:
N = 5; I = 8.30; PV = 0; PMT = -5000; and then solve for FV = $29,508.98.

49. Required annuity payments Answer: c Diff: M

Enter CFs:
CF0 = 0; CF1 = 1.2; CF2 = 1.6; CF3 = 2.0; CF4 = 2.4; CF5 = 2.8.
I = 10; NPV = $7.2937 million.
$1 + $7.2937 = $8.2937 million.

Now, calculate the annual payments:

BEGIN mode, N = 5; I/YR = 10; PV = -8.2937; FV = 0; and then solve for PMT = $1.989 million.

50. Required annuity payments Answer: b Diff: M

Step 1: Work out how much Karen will have saved by age 65:
Enter the following inputs in the calculator:
N = 41; I = 10; PV = 0; PMT = 5000; and then solve for FV = $2,439,259.

Step 2: Figure the payments Kathy will need to make to have the same amount saved as
Karen:
Enter the following inputs in the calculator:
N = 36; I = 10; PV = 0; FV = 2439259; and then solve for PMT = $8,154.60.

51. Required annuity payments Answer: c Diff: M

Step 1: Figure out how much their house will cost when they buy it in
5 years:
Enter the following input data in the calculator:
N = 5; I = 3; PV = -120000; PMT = 0; and then solve for FV = $139,112.89.

This is how much the house will cost.

Step 2: Determine the maximum mortgage they can get, given that the nominal interest rate
will be 7 percent, it is a 360-month mortgage, and the payments will be $500:
N = 360; I = 7/12 = 0.5833; PMT = -500; FV = 0; and then solve for PV = $75,153.78.

This is the PV of the mortgage (that is, the total amount they can borrow).

Step 3: Determine the down payment needed:

House prices are $139,112.89, and they can borrow only $75,153.78. This means the
down payment will have to be:
Down payment = $139,112.89 - $75,153.78 = $63,959.11.

This is the amount they will have to save to buy their house.

Chapter 6 - Page 74
 Step 4: Determine how much they need to deposit each year to reach this goal:
N = 5; I = 10; PV = -2000; FV = 63959.11; and then solve for PMT = $9,948.75  $9,949.
52. Required annuity payments Answer: a Diff: M N

Here’s a time line depicting the problem:

25 30 35 40 65
10%
| | | |    |
P MT 2 P MT 3 P MT 4 P MT FV = 2, 000, 000

$2,000,000 = PMT(1.10)40 + 2PMT(1.10)35 + 3PMT(1.10)30 + 4PMT(1.10)25

$2,000,000 = 45.259256PMT + 56.204874PMT + 52.348207PMT + 43.338824PMT
$2,000,000 = 197.15116PMT
$10,144.50 = PMT
PMT  $10,145.

53. NPV and non-annual discounting Answer: b Diff: M

5 %/ 1 2 =
Cu r r e n t 0 0. 4167% 1 2 3 12
l ease | | | |    |
0 - 500 - 500 - 500 - 500

I nput s 12 5/ 12 = 0. 4167 500 0

N I PV P MT FV

Ou t p u t = - 5, 840. 61

5 %/ 1 2 =
Ne w 0 0. 4167% 1 2 3 4 12
l ease | | | | |    |
0 0 0 0 - 700 - 700

CF0 = 0; CF1-3 = 0; CF4-12 = -700; I = 0.4167; and then solve for NPV =
-$6,094.23.

Therefore, the PV of payments under the proposed lease would be greater than the PV of
payments under the old lease by $6,094.23 - $5,840.61 = $253.62. Thus, your net worth would
decrease by $253.62.

Chapter 6 - Page 75
54. PV of an uneven CF stream Answer: c Diff: T

Time Line:
i = 4% i = 5%
0 1 2 3 4 5 6 7 8 Yr s
| | | | | | | | |
PV = ? - 100 - 100 - 100 +200 +300 +300 +300 +300

- 277. 51
1, 070. 00 1, 203. 60
792. 49
Financial calculator solution:
Inputs: CF0 = 0; CF1 = -100; Nj = 3; I = 4.
Output: NPV = -277.51.

Calculate the PV of CFs 4-8 as of time = 3 at i = 5%

Inputs: CF0 = 0; CF1 = 200; CF2 = 300; Nj = 4; I = 5.
Output: NPV3 = $1,203.60.

Calculate PV of the FV of the positive CFs at time = 3

Inputs: N = 3; I = 4; PMT = 0; FV = -1203.60.
Output: PV = $1,070.

Total PV = $1,070 - $277.51 = $792.49.

55. PV of an uneven CF stream Answer: d Diff: T

T i me Li ne:
0 1 2 18 19 20 21 22
i = 6%
| | |    | | | | |
+100 +100 +100 - 6, 115. 91 - 6, 727. 50 - 7, 400. 25 - 8, 140. 27
-$8,554.84 PV of health care costs
1,082.76 PV of parents’ savings
-$7,472.08 Lump sum government must set aside

Find the present value of parent’s savings: N = 18; I = 6; PMT = -100; FV = 0; and then solve for PV
= $1,082.76.

Health care costs, Years 19-22: -$1,000(1.1)19 = -$6,115.91; -$1,000(1.1)20 = -$6,727.50; -$1,000(1.1)21
= -$7,400.25; -$1,000(1.1)22 = -$8,140.27.

Find the present value of health care costs: CF0 = 0; CF1-18 = 0; CF19 = -6115.91; CF20 = -6727.50;
CF21 = -7400.25; CF22 = -8140.27; I = 6; and then solve for NPV = -8,554.84 = PV of health care
costs.

Consequently, the government must set aside $8,554.84 - $1,082.76 = $7,472.08.

Chapter 6 - Page 76
56. Required annuity payments Answer: b Diff: T

College cost today = $10,000, Inflation = 5%. CF0 = $10,000  (1.05)5 = $12,762.82  1 = $12,762.82; CF1 =
$10,000  (1.05)6 = $13,400.96  1 = $13,400.96; CF2 = $10,000  (1.05)7 = $14,071.00  2 = $28,142.00; CF3 =
$10,000  (1.05)8 = $14,774.55  2 = $29,549.10; CF4 = $10,000  (1.05)9 = $15,513.28  1 = $15,513.28; CF5 =
$10,000  (1.05)10 = $16,288.95  1 = $16,288.95.

Financial calculator solution:

Enter cash flows in CF register; I = 8; solve for NPV = $95,244.08.
Calculate annuity:
N = 5; I = 8; PV = -50000; FV = 95244.08; and then solve for PMT = $3,712.15.

57. Required annuity payments Answer: b Diff: T

Step 1: Calculate the present value of college costs at t = 16 (Treat

t = 16 as Year 0.):
Remember, costs are incurred at end of year.
CF0 = 25000; CF1 = 25000; CF2 = 50000; CF3 = 50000; CF4 = 25000; CF5 = 25000; I = 8; and
then solve for NPV = $166,097.03.

Step 2: Calculate the annual required deposit:

N = 16; I = 8; PV = 0; FV = -166097.03; then solve for PMT = $5,477.36.

Chapter 6 - Page 77
58. Required annuity payments Answer: c Diff: T

Go e s o n
I nf l . = 5% Re t i r e s We l f a r e
0 i = 8% 1 2 3 4 5
| | | | | |
40, 000 44, 100 44, 100 44, 100

122, 742
100, 000 ( 116, 640)
P MT P MT 6, 102

Step 1: The retirement payments, which begin at t = 2, must be:

$40,000(1 + Infl.)2 = $40,000(1.05)2 = $44,100.

Step 2: There will be 3 retirement payments of $44,100, made at t = 2, t = 3, and t = 4. We find the PV of
an annuity due at t = 2 as follows:
Set calculator to Begin mode. Then enter:
N = 3; I = 8; PMT = 44100; FV = 0; and then solve for PV = $122,742. If he has this
amount at t = 2, he can receive the
3 retirement payments.

Step 3: The $100,000 now on hand will compound at 8% for 2 years:

$100,000(1.08)2 = $116,640.

Step 4: So, he must save enough each year to accumulate an additional $122,742 - $116,640
= $6,102:
Need at t = 2 $122,742
Will have ( 116,640)
Net additional needed $ 6,102

Step 5: He must make 2 payments, at t = 0 and at t = 1, such that they will grow to a total of
$6,102 at t = 2.
This is the FV of an annuity due found as follows:
Set calculator to Begin mode. Then enter:
N = 2; I = 8; PV = 0; FV = 6102; and then solve for PMT = $2,716.

Chapter 6 - Page 78
59. Required annuity payments Answer: d Diff: T
Go e s o n
I nf l . = 5% Re t i r e s We l f a r e
0 i = 8% 1 2 3 4 5
| | | | | |
40, 000 44, 100 46, 305 48, 620

128, 659
100, 000 ( 116, 640)
P MT P MT 12, 019

Step 1: The retirement payments, which begin at t = 2, must be:

t = 2: $40,000(1.05)2 = $44,100.
t = 3: $44,100(1.05) = $46,305.
t = 4: $46,305(1.05) = $48,620.

Step 2: Now we need enough at t = 2 to make the 3 retirement payments as calculated in

Step 1. We cannot use the annuity method, but we can enter, in the cash flow register,
the following:
CF0 = 44100; CF1 = 46305; CF2 = 48620. Then enter I = 8; and press  NPV to find
NPV = PV = $128,659.

Step 3: The $100,000 now on hand will compound at 8% for 2 years:

$100,000(1.08)2 = $116,640.

Step 4: The net funds needed is:

Need at t = 2 $ 128,659
Will have ( 116,640)
Net needed $ 12,019

Step 5: Find the payments needed to accumulate $12,019. Set the calculator to Begin
mode and then enter:
N = 2; I = 8; PV = 0; FV = 12019; and then solve for PMT = $5,350.

60. Required annuity payments Answer: c Diff: T

0 i = 8% 1 2 3 4 23 24 40

| | | | |    | |    |
( 360. 39) 25 25 25 30 30 P MT P MT

298. 25
62. 14 364. 85

Calculate the NPV of payments in Years 1-23:

CF0 = 0; CF1-3 = 25; CF4-23 = 30; I = 8; and then solve for NPV = $298.25.
Difference between the security’s price and PV of payments:
$360.39 - $298.25 = $62.14.
Calculate the FV of the difference between the purchase price and PV of payments, Years 1-23:
N = 23; I = 8; PV = -62.14; PMT = 0; and then solve for FV = $364.85.

Chapter 6 - Page 79
 Calculate the value of the annuity payments in Years 24-40:
N = 17; I = 8; PV = -364.85; FV = 0; and then solve for PMT = $40.

61. Required annuity payments Answer: a Diff: T

0 1 2 3 4 5 6 7 8 9 10 11 12 13
12%
| | | | | | | | | | | | | |
Sav i ngs: 5, 000
Co n t r i b . 3 , 0 0 0 3, 000 3, 000 3, 000 3, 000 P MT P MT P MT P MT P MT P MT
Co l l e g e : 24, 433 25, 655 26, 938 28, 285
PV c o l l e g e c os t s = 88, 947

Step 1: Determine college costs:

College costs will be $15,000(1.05)10 = $24,433 at t = 10, $15,000(1.05)11 = $25,655 at
t = 11, $15,000(1.05)12 = $26,938 at t = 12, and $15,000(1.05)13 = $28,285 at t = 13.

Step 2: Determine PV of college costs at t = 10:

Enter the cash flows into the cash flow register as follows:
CF0 = 24433; CF1 = 25655; CF2 = 26938; CF3 = 28285; I = 12; and then solve for NPV =
$88,947.

Step 3: Determine the value of their savings at t = 4 as follows:

N = 4; I = 12; PV = 8000; PMT = 3000; and then solve for FV = $26,926.

Step 4: Determine the value of the annual contributions from t = 5 through t = 10:
N = 6; I = 12; PV = -26926; FV = 88947; and then solve for PMT = -$4,411.

62. Required annuity payments Answer: a Diff: T

Chapter 6 - Page 80
 0 1 2 6 7 11 Ye ar s
25 26 27 28 29 30 31 35 36 40 Bi r t h d a y s
| | | | | | |    | |    |
25, 000 2, 000 3, 000 4, 000 5, 000 P MT P MT P MT P MT P MT

4, 480. 00 - 20, 000

3, 763. 20 FV = 400, 000
2, 809. 86
39, 337. 98
$55, 391. 04
- 10, 132. 62
$45, 258. 42

Step 1: Compound cash flows from birthdays 25, 26, 27, and 28 to 29th birthday:
$25,000(1.12)4 + $2,000(1.12)3 + $3,000(1.12)2 + 4,000(1.12) + $5,000(1.12)0
= $39,337.98 + $2,809.86 + $3,763.20 + $4,480.00 + $5,000.00
= $55,391.04.

Step 2: Discount $20,000 withdrawal back to 29th birthday (6 years):

N = 6; I = 12; PMT = 0; FV = 20000; and then solve for PV = $10,132.62. (Remember to add
minus sign as this is a withdrawal.)

Step 3: Subtract the present value of the withdrawal from the compounded values of the
deposits to obtain the net amount on hand at birthday 29 (after the $20,000 withdrawal is
considered):
$55,391.04 - $10,132.62 = $45,258.42.

Step 4: Solve for the required annuity payment as follows:

N = 11; I = 12; PV = -45258.42; FV = 400000; and then solve for PMT = $11,743.95.

63. Required annuity payments Answer: c Diff: T

Step 1: Convert the 9 percent monthly rate to an annual rate.

Enter NOM% = 9; P/YR = 12; and then solve for EFF% = 9.3807%.

Chapter 6 - Page 81
 Step 2: Compute the amount accumulated by age 40. Remember to change P/YR from 12 to
1. BEGIN mode. Then, enter N = 15; I = 9.3807; PV = 0; PMT = 2000; and then solve
for FV = $66,184.35.

Step 3: John needs $3 million in 25 years. Find the PV of this amount today. Remember to
change your calculator back from BEGIN to END mode. Enter N = 25; I = 12; FV =
3000000; PMT = 0; and then solve for PV = $176,469.92.

Step 4: Find the shortfall today, the difference between the present value of what he needs in 25
years and the present value of what he’s accumulated today. $176,469.92 - $66,184.35 =
$110,285.57.

Step 5: Find the annuity needed to cover this shortfall. Since the contributions begin today this is
an annuity due, so the calculator must be set up in BEGIN mode. (Remember to change
your calculator back from BEGIN to END mode after working this problem.) BEGIN mode.
Then, enter N = 26; I = 12; PV = -110285.57; FV = 0; and then solve for PMT = $12,471.31 
$12,471.

64. Required annuity payments Answer: a Diff: T

Step 1: Calculate the cost of tuition in each year:

College cost today = $15,000, Inflation = 5%.
$15,000(1.05)6 = $20,101.43(1) = $20,101.43; $15,000(1.05)7 = $21,106.51(1) =
$21,106.51; $15,000(1.05)8 = $22,161.83(2) = $44,323.66; $15,000(1.05)9 =
$23,269.92(2) = $46,539.85; $15,000(1.05)10 = $24,433.42(1) = $24,433.42;
$15,000(1.05)11 = $25,655.09(1) = $25,655.09.

Step 2: Find the present value of college costs at t = 0:

CF0 = 0; CF1-5 = 0; CF6 = 20101.43; CF7 = 21106.51; CF8 = 44323.66; CF9 = 46539.85;
CF10 = 24433.42; CF11 = 25655.09; I = 12; and then solve for NPV = $69,657.98.

Step 3: Find the PV of the $25,000 gift received in Year 3:

N = 3; I = 12; PMT = 0; FV = 25000; and then solve for PV =
-$17,794.51.

Step 4: Calculate the PV of the net amount needed to fund college costs:
$69,657.98 - $17,794.51 = $51,863.47.

Step 5: Calculate the annual contributions:

BEGIN, N = 12; I = 12; PV = -51863.47; FV = 0; and then solve for PMT = $7,475.60.

65. Required annuity payments Answer: b Diff: T

First, what will be the present value of the college costs plus the $50,000 nest egg as of
September 1, 2017?

The first tuition payment, CF0, will equal $10,000  (1.06)15 = $23,965.58. Each tuition payment
will increase by 6%, hence CF1 = $25,403.52; CF2 = $26,927.73; CF3 = $28,543.39; and CF4 =
$50,000 (the nest egg); I = 8. The present value at September 1, 2017, at 8%, is $129,983.70.

Now, what payments are needed every year until then?

Chapter 6 - Page 82
 N = 15; I = 8; PV = 10000; FV = -129983.70; and then solve for PMT = $3,618.95.

66. Required annuity payments Answer: a Diff: T

Step 1 Calculate the cost of tuition in each year:

$25,000(1.05)15 = $51,973.20; $25,000(1.05)16 = $54,571.86  2 = $109,143.73;
$25,000(1.05)17 = $57,300.46  2 = $114,600.92; $25,000(1.05)18 = $60,165.48  2 =
$120,330.96; $25,000(1.05)19 = $63,173.75.

Step 2 Find the present value of these costs at t = 15:

CF0 = 51973.20; CF1 = 109143.73; CF2 = 114600.92; CF3 = 120330.96; CF4 = 63173.75;
I = 12; and then solve for NPV = $366,579.37.

Step 3 Calculate the FV of Grandma’s deposits at t = 15:

Older son: $10,000(1.12)18 = $ 76,899.66 (Deposit was made 3 years ago.)
Younger son: $10,000(1.12)17 = $ 68,660.41 (Deposit was made 2 years ago.)
Total = $145,560.07

Step 4 Calculate net total amount needed at t = 15:

$366,579.37 - $145,560.07 = $221,019.30.

Step 5 Calculate the annual required deposits:

N = 15; I = 12; PV = 0; FV = 221019.30; and then solve for PMT = -$5,928.67.

67. Required annuity payments Answer: a Diff: T

Step 1: Calculate how much Donald will retire with:

Enter the following input data in the calculator:
N = 40; I = 12; PV = -10000; PMT = -5000 and then solve for FV = $4,765,966.81.
(Note that the beginning amount and annual contribution are entered as negative
amounts since they are deposits made into the account.)

Step 2: Now, calculate what Jerry’s annual contribution must be:

N = 36; I = 12; PV = 0; FV = 4765966.81; and then solve for PMT = $9,837.63  $9,838.
(Note that we didn’t have to use the BEGIN mode because the cash flows can be
assumed to come at the end of the year, if we assume that Jerry’s birthday occurs at
the end of the year.)

Alternative way:

Chapter 6 - Page 83
 Using the BEGIN mode we could arrive at the same required annuity payment in a different way, if
we assume that the payments occur at the start of the year. But, we also have to move the FV
ahead one year so that it in effect occurs at the end of the last year.

Enter the following input data in the calculator:

BEGIN, N = 36; I = 12; PV = 0; FV = 4,765,966.81  1.12 = 5337882.83, and then solve for PMT =
$9,837.63  $9,838.

68. Required annuity payments Answer: b Diff: T

Step 1: Find out what the cost of college will be in six years:
Enter the following input data in the calculator:
N = 6; I = 5; PV = -20000; PMT = 0; and then solve for FV = $26,801.9128.

Step 2: Calculate the present value of his college cost:

Enter the following input data in the calculator:
N = 6; I = 10; PMT = 0; FV = 26801.9128; and then solve for PV = $15,128.98.

Step 3: Find the present value today of the $15,000 that will be withdrawn in two years for the
purchase of a used car:
Enter the following input data in the calculator:
N = 2; I = 10; PMT = 0; FV = 15000; and then solve for PV = $12,396.69.

So in total, in today’s dollars, he needs $15,128.98 + $12,396.69 = $27,525.67, and his

shortfall in today’s dollars is $25,000 - $27,525.67 = $2,525.67.

Step 4: Find out how much Bob has to save at the end of each year to make up the
$2,525.67:
Enter the following input data in the calculator:
N = 6; I = 10; PV = -2525.67; FV = 0; and then solve for PMT = $579.9125  $580.
69. Required annuity payments Answer: e Diff: T N

We must find the PV of the amount we can sell the car for in 4 years. Enter the following data into
your financial calculator:
N = 48; I = 1; FV 6000; PMT = 0; and then solve for PV = $3,721.56.

This means that the total cost of the car, in present value terms is:
$17,000 – $3,721.56 = $13,278.44.

Now, we need to find the lease payment that equates to this present value. Enter the following data
into your financial calculator:
N = 48; I = 1; PV = 13278.44; FV = 0; and then solve for PMT = $349.67.

70. Required annuity payments Answer: c Diff: T N

Here is the diagram of the problem:

24 25 64 65 84
0 1 40 41 60
9%
| |    | |    |
1, 000 X X - 100, 000 - 100, 000

Chapter 6 - Page 84
 Step 1: Determine the PV at his 64th birthday of the cash outflows from his 65th birthday to
his 84th birthday. Using a financial calculator, enter the following input data:
N = 20; I = 9; PMT = -100000; FV = 0; and then solve for PV = $912,854.57.

This is the amount he needs to have in his account on his 64th birthday in order to
make 20 withdrawals of $100,000 from his account.

Step 2: Determine the required annual payment (deposit) that will achieve this goal, given the
$1,000 original deposit. Using a financial calculator, enter the following input data:
N = 40; I = 9; PV = -1000; FV = 912854.57; and then solve for PMT = $2,608.73.

71. Required annuity payments Answer: a Diff: T N

45 65 66 85
k = 10%
| | |    | |    |
50, 000 10, 000 10, 000 10, 000 P MT P MT

Step 1: Calculate the value of his deposits and the initial balance of his brokerage account at
age 65:
N = 20; I = 10; PV = 50000; PMT = 10000; and then solve for FV = $909,124.9924.

Step 2: Determine the amount of his 20-year annuity (withdrawals) based on the value of his
brokerage account determined above:
N = 20; I = 10; PV = 909124.9924; FV = 0; and then solve for PMT = $106,785.48.

Thus, he can withdraw $106,785.48 from the account starting on his 66th birthday, and do so for the
next 20 years, leaving a final account balance of zero on his last withdrawal on his 85th birthday.

72. Annuity due vs. ordinary annuity Answer: e Diff: T

There is more than one way to solve this problem.

Step 1: Draw the time line:

Chapter 6 - Page 85
 25 26 27 64 65
0 1 2 39 40
k = 12%
| | |    | |
Bi l l P MT P MT P MT P MT P MT
FV = $3M
Bob P MT P MT P MT P MT
FV = $3M
Step 2: Determine each’s annual contribution:
Bill: He starts investing today, so use the BEG mode of the calculator.
Enter the following input data in the calculator:
N = 41; I = 12; PV = 0; FV = 3,000,000  1.12 = 3360000; and then solve for PMT =
$3,487.79. (The FV is calculated as $3,360,000 because the annuity will calculate the
value to the end of the year, until Bill is a second away from age 66. Therefore, since
he wants to have $3,000,000 by age 65, he would have $3,000,000  1.12 one second
before he turns 66.)
Bob: He starts investing at the end of this year, so use the END mode of the
calculator.
Enter the following input data in the calculator:
N = 40; I = 12; PV = 0; FV = 3000000; and then solve for PMT = $3,910.88.

Step 3: Determine the difference between the two payments:

The difference is $3,910.88 - $3,487.79 = $423.09.

73. Amortization Answer: b Diff: T

Time Line (in thousands):

0 1 2 3 20 Ye ar s
i = 8%
| | | |    |
P MT C = 80 80 80 80
P MT R P MT R P MT R FV = 1, 000
An n u a l P MT Tot al = P MT C o u p o n + P MT R e s e r v e = $ 8 0 , 0 0 0 + P MT R e s e r v e .

Financial calculator solution:

Long way Inputs: N = 20; I = 8; PV = 0; FV = 1000000.
Output: PMT = -$21,852.21.
Add coupon interest and reserve payment together
Annual PMTTotal = $80,000 + $21,852.21 = $101,852.21.
Total number of tickets = $101,852.21/$10.00 = 10,185.22  10,186.*
Short way Inputs: N = 20; I = 8; PV = 1000000; FV = 0.
Output: PMT = -$101,852.21.
Total number of tickets = $101,852.21/$10.00  10,186.*

*Rounded up to next whole ticket.

74. FV of an annuity Answer: c Diff: T

Step 1: The value of what they have saved so far is:

Enter the following input data in the calculator:
N = 25; I = 12; PV = -20000; PMT = -5000; and then solve for FV = $1,006,670.638.

Step 2: Deduct the amount to be paid out in 3 years:

Enter the following input data in the calculator:

Chapter 6 - Page 86
 N = 3; I = 12; PMT = 0; FV = 150000; and then solve for PV = $106,767.037.
The value remaining is $1,006,670.638 – $106,767.037 = $899,903.601.

Step 3: Determine how much will be in the account on their 58th birthday, after 8 more annual
contributions:
Enter the following input data in the calculator:
N = 8; I = 12; PV = -899903.601; PMT = -5000; and then solve for FV = $2,289,626.64 
$2,289,627.

75. FV of an annuity Answer: e Diff: T

Step 1: The first step is to draw the time line. This is critical. Next, break the story up into
three parts--the 40’s, the 50’s, and the 60’s.
40 41 49 50 59 60 65
k = 11%
| |    | |    | |    |
100, 000 10, 000 10, 000 20, 000 20, 000 25, 000 25, 000

Put your calculator in END mode, set P/YR = 1.

Step 2: Calculate the FV of her 40’s contributions on her 49th birthday:

N = 9; I/YR = 11; PV = -100000; PMT = -10000; and then solve for FV49 = $397,443.41.

Now, this is the PV of her contributions on her 49th birthday.

Step 3: Determine the FV of her contributions through her 59th birthday:

N = 10; I/YR = 11; PV49 = -397443.41; PMT = -20000; and then solve for FV59 =
$1,462,949.35.

Now, this is the PV of her contributions so far on her 59th birthday.

Step 4: Determine the FV of all her contributions:

N = 6; I = 11; PV59 = -1462949.35; PMT = -25,000; and then solve for FV65 =
$2,934,143.24  $2,934,143.

76. EAR and FV of annuity Answer: c Diff: T N

First, we must find the appropriate effective rate of interest. Using your calculator enter the following
data as inputs as follows:
NOM% = 6; P/YR = 12; and then solve for EFF% = 6.167781%.

Chapter 6 - Page 87
 Since the contributions are being made every 6 months, we need to determine the nominal annual rate
based on semiannual compounding. Enter the following data in your calculator as follows:
EFF% = 6.167781%; P/YR = 2; and then solve for NOM% = 6.0755%.

Now use the periodic rate 6.0755%/2 = 3.037751% to calculate the FV of the annuities due. Now, we
must solve for the value of all contributions as of the end of Year 2. Enter the following data inputs in
your calculator:
N = 4; I = 3.037751; PV = 1000; PMT = 1000; and then solve for FV = $5,313.14.

So, these contributions will be worth $5,313.14 as of the end of Year 2. Now, we must find the value
of this investment after the eighth year. For this calculation, we can use annual periods and the
effective annual rate calculated earlier. Enter the following data as inputs to your calculator:
N = 6; I = 6.167781; PV = -5313.14; PMT = 0; and then solve for FV = $7,608.65  $7,609.
77. FV of annuity due Answer: a Diff: T

First, convert the 9 percent return with quarterly compounding to an effective rate of 9.308332%.
With a financial calculator, NOM% = 9; P/YR = 4; EFF% = 9.308332%. (Don’t forget to change P/YR
= 4 back to P/YR = 1.) Then calculate the FV of all but the final payment. BEGIN MODE (1 P/YR)
N = 9; I/YR = 9.308332; PV = 0; PMT = 1500; and solve for FV = $21,627.49. You must then add
the $1,500 at t = 9 to find the answer, $23,127.49.

78. FV of investment account Answer: b Diff: T

We need to figure out how much money they would have saved if they didn’t pay for the college
costs.
N = 40; I = 10; PV = 0; PMT = -12000; and then solve for FV = $5,311,110.67.

Now figure out how much they would use for college costs. First get the college costs at one point
in time, t = 20, using the cash flow register. CF0 = 58045; CF1 = 62108; CF2 = 66,456  2 = 132912
(two kids in school); CF3 = 71,108  2 = 142216; CF4 = 76086; CF5 = 81411; I = 10; NPV =
$433,718.02.

The value of the college costs at year t = 20 is $433,718.02. What we want is to know how much
this is at t = 40.
N = 20; I = 10; PV = -433718.02; PMT = 0; and then solve for FV = $2,917,837.96.

The amount in the nest egg at t = 40 is the amount saved less the amount spent on college.
$5,311,110.67 - $2,917,837.96 = $2,393,272.71  $2,393,273.

Chapter 6 - Page 88
79. Effective annual rate Answer: c Diff: T

T i me L i n e :
0 12 24 27 Mo n t h s
0 i = ? 1 2 2. 25
| | | |
- 8, 000 10, 000

Numerical solution:
Step 1: Find the effective annual rate (EAR) of interest on the bank deposit
EARDaily = (1 + 0.080944/365)365 - 1 = 8.43%.

Step 2: Find the EAR of the investment

$8,000 = $10,000/(1 + i)2.25
2.25
(1 + i) = 1.25
1+i = 1.25(1/2.25)
1+i = 1.10426
i = 0.10426  10.43%

Step 3: Difference = 10.43% - 8.43% = 2.0%.

Financial calculator solution:

Calculate EARDaily using interest rate conversion feature
Inputs: P/YR = 365; NOM% = 8.0944. Output: EFF% = EAR = 8.43%.

Calculate EAR of the equal risk investment

Inputs: N = 2.25; PV = -8000; PMT = 0; FV = 10000.
Output: I = 10.4259  10.43%.
Difference: 10.43% - 8.43% = 2.0%.

80. PMT and quarterly compounding Answer: b Diff: T

0 1 80 81 82 83 84 85 115 116 Qt r s .
i = 2%
| |    | | | | | |    | |
+400 +400
P MT 0 0 0 P MT 0 0 P MT
Find the FV at t = 80 of $400 quarterly payments:
N = 80; I = 2; PV = 0; PMT = 400; and then solve for FV = $77,508.78.

Find the EAR of 8%, compounded quarterly, so you can determine the value of each of the
receipts:

Chapter 6 - Page 89
 4
 0.08 
EAR = 1 +  - 1 = 8.2432%.
 4 

Now, determine the value of each of the receipts, remembering that this is an annuity due.
Put the calculator in BEG mode and enter the following input data in the calculator:
N = 10; I = 8.2432; PV = -77508.78; FV = 0; and then solve for PMT = $10,788.78  $10,789.

81. Non-annual compounding Answer: a Diff: T

To compare these alternatives, find the present value of each strategy and select the option with
the highest present value.

Option 1 can be valued as an annuity due.

Enter the following input data in the calculator:
BEGIN mode (to indicate payments will be received at the start of the period) N = 12; I = 12/12 =
1; PMT = -1000; FV = 0; and then solve for PV = $11,367.63.

Option 2 can be valued as a lump sum payment to be received in the future.

Enter the following input data in the calculator:
END mode (to indicate the lump sum will be received at the end of the year) N = 2; I = 12/2 = 6; PMT = 0;
FV = -12750; and then solve for PV = $11,347.45.

Option 3 can be valued as a series of uneven cash flows. The cash flows at the end of each
period are calculated as follows:
CF0 = $0.00; CF1 = $800.00; CF2 = $800.00(1.20) = $960.00; CF3 = $960.00 (1.20) = $1,152.00; CF4
= $1,152.00(1.20) = $1,382.40; CF5 = $1,382.40 (1.20) = $1,658.88; CF6 = $1,658.88(1.20) =
$1,990.66; CF7 = $1,990.66 (1.20) = $2,388.79; CF8 = $2,388.79(1.20) = $2,866.54.

To find the present value of this cash flow stream using your financial calculator enter:
END mode (to indicate the cash flows will occur at the end of each period) 0 CFj; 800 CFj; 960 CFj;
1152 CFj; 1382.40 CFj; 1658.88 CFj; 1990.66 CFj; 2388.79 CFj; 2866.54 CFj (to enter the cash
flows);I/YR = 12/4 = 3; solve for NPV = $11,267.37.

Choose the alternative with the highest present value, and hence select Choice 1 (Answer a).

Chapter 6 - Page 90
82. Value of unknown withdrawal Answer: d Diff: T

Step 1: Find out how much Steve and Robert have in their accounts today:
You can get this from analyzing Steve’s account.
End mode: N = 9; I = 6; PV = -5000; PMT = -5000; and then solve for FV =
$65,903.9747.
Alternatively, Begin mode: N = 9; I = 6; PV = 0; PMT = -5000; and then solve for FV =
$60,903.9747.
Then add the $5,000 for the last payment to get a total of $65,903.9747.
This is also the value of Robert’s account today.

Step 2: Find out how much Robert would have had if he had never withdrawn anything:
End mode: N = 9; I = 12; PV = -5000; PMT = -5000; and then solve for FV =
$87,743.6753.
Alternatively, Begin mode: N = 9; I = 12; PV = 0; PMT = -5000; and then solve for FV =
$82,743.6753.
Then add the $5,000 for the last payment to get a total of $87,743.6753.

Step 3: Find the difference in the value of Robert’s account due to the withdrawal made:
However, since he took money out at age 27, he has only $65,903.9747. The
difference between what he has and what he would have had is:
$87,743.6753 - $65,903.9747 = $21,839.7006.

Step 4: Determine the amount of Robert’s withdrawal by compounding the value found in
Step 3:
N = 3; I = 12; PMT = 0; FV = -21839.7006; then solve for PV = $15,545.0675 
$15,545.07.

83. Breakeven annuity payment Answer: a Diff: T N

Step 1: Calculate the NPV of purchasing the car by entering the following data in your financial
calculator:
CF0 = -17000; CF1-47 = 0; CF48 = 7000; I = 6/12 = 0.5; and then solve for NPV = -
$11,490.31.

Step 2: Now, use the NPV calculated in Step 1 to determine the breakeven lease payment that
will cause the two NPVs to be equal. Enter the following data in your financial
calculator:
N = 48; I = 0.5; PV = -11490.31; FV = 0; and then solve for PMT = $269.85.

84. Required mortgage payment Answer: b Diff: E N

Just enter the following data into your calculator and solve for the monthly mortgage payment.

N = 360; I = 7/12 = 0.583333; PV = -115000; FV = 0; and then solve for PMT = $765.0979  $765.10.
85. Remaining mortgage balance Answer: e Diff: E N

Chapter 6 - Page 91
 With the data still input into your calculator, using an HP-10B press
1 INPUT 60  AMORT
= displays Interest: $39,157.2003
= displays Principal: $6,748.6737
= displays Balance: $108,251.3263

86. Time to accumulate a lump sum Answer: d Diff: E N

You must solve this time value of money problem for N (number of years) by entering the
following data in your calculator:
I = 10; PV = -2000; PMT = -1000; FV = 1000000; and then solve for N = 46.51.

Because there is a fraction of a year and the problem asks for whole years, we must round up to the
next year. Hence, the answer is 47 years.

87. Required annual rate of return Answer: c Diff: E N

Now, the time value of money problem has been modified to solve for I. Enter the following data
in your calculator:
N = 39; PV = -2000; PMT = -1000; FV = 1000000; and then solve for I = 12.57%.

88. Monthly mortgage payments Answer: c Diff: E N

Enter the following data as inputs in your calculator:

N = 30  12 = 360; I = 7.2/12 = 0.60; PV = -100000; FV = 0; and then solve for PMT = $678.79.

89. Amortization Answer: d Diff: M N

Use your calculator, after entering the data to determine the mortgage payment, as follows:
1 INPUT 36  AMORT
= Interest: $21,280.8867
= Principal: $3,155.4885
= Balance: $96,844.5115.
$ 3, 155 . 49 $ 3, 155 . 49
So, thepercentagethat goes toprincipal= = = 12.91%.
36  $ 678 . 79 $ 24 , 436 . 44

90. Monthly mortgage payments Answer: d Diff: E N

Using your financial calculator, enter the following data inputs:

N = 180; I = 7.75/12 = 0.645833; PV = -165000; FV = 0; and then solve for PMT = $1,553.104993 
$1,553.10.

91. Remaining mortgage balance Answer: c Diff: E N

Chapter 6 - Page 92
 The complete solution looks like this:

Beginning Mortgage Ending

of Period Balance Payment Interest Mortgage Balance
1 $165,000.00 $1,553.10 $1,065.63 $164,512.52
2 164,512.52 1,553.10 1,062.48 164,021.89
3 164,021.89 1,553.10 1,059.31 163,528.09
4 163,528.09 1,553.10 1,056.12 163,031.11
5 163,031.11 1,553.10 1,052.91 162,530.91
6 162,530.91 1,553.10 1,049.68 162,027.49
7 162,027.49 1,553.10 1,046.43 161,520.81
8 161,520.81 1,553.10 1,043.16 161,010.86
9 161,010.86 1,553.10 1,039.86 160,497.62
10 160,497.62 1,553.10 1,036.55 159,981.06
11 159,981.06 1,553.10 1,033.21 159,461.16
12 159,461.16 1,553.10 1,029.85 158,937.91

Alternatively, using your financial calculator, do the following (with the data still entered from the
previous problem):

1 INPUT 12  AMORT
= Interest: $12,575.172755
= Principal: $6,062.087161
= Balance: $158,937.912839

92. Amortization Answer: d Diff: M N

Step 1: Find the monthly payment:

N = 360; I = 8/12 = 0.6667; PV = 75000; FV = 0; and then solve for PMT = $550.3234.

Step 2: Calculate value of monthly payments for the first year:

Total payments for the first year are $550.3234  12 = $6,603.8812.

Step 3: Use calculator to determine amount of interest during first year:

1 INPUT 12  AMORT
= Interest: $5,977.3581
= Principal: $626.5227
= Balance: $74,373.4773

Step 4: Calculate percentage of monthly payments that goes towards interest:

$5,977.3581/$6,603.8812 = 0.9051, or 90.51%.

93. Amortization Answer: a Diff: E N

Step 1: Calculate old monthly payment:

Chapter 6 - Page 93
 N = 360; I = 8/12 = 0.6667; PV = 75000; FV = 0; and then solve for PMT = $550.3234.

Step 2: Calculate new monthly payment:

N = 360; I = 7/12 = 0.5833; PV = 75000; FV = 0; and then solve for PMT = $498.9769.

Step 3: Calculate the difference between the 2 mortgage payments:

This represents a savings of ($550.3234 – $498.9769) = $51.3465  $51.35.

94. Monthly mortgage payment Answer: c Diff: E N

Enter the following data in your calculator:

N = 360; I = 7.2/12 = 0.60; PV = 300000; FV = 0; and then solve for PMT = $2,036.3646 
$2,036.36.

95. Amortization Answer: b Diff: M N

Using the 10-B calculator, and using the above information:

1 INPUT 12  AMORT
= Interest: $21,504.5022
= Principal: $2,931.8730
= Balance: $297,068.1270

The percent paid toward principal = $2,931.87/($2,931.87 + $21,504.50) = 12%.

96. Monthly loan payments Answer: a Diff: E N

Enter the following data as inputs in your financial calculator:

N = 48; I = 12/12 = 1; PV = -15000; FV = 0; and then solve for PMT = $395.01.

97. Amortization Answer: e Diff: M N

Use the calculator’s amortization functions and the PMT information from the previous question.
Enter the following data as inputs:
1 INPUT 24  AMORT
= Interest: $2,871.49
= Principal: $6,608.75
= Balance: $8,391.25

Total Payments = 24  $395.01 = $9,480.24.

Percentage of payments that goes towards repayment of principal:

$6,608.75/$9,480.24 = 0.6971, or 69.71%.

98. Effective annual rate Answer: e Diff: E N

Enter the following data as inputs in your financial calculator:

P/Yr = 12; Nom% = 12, and then solve for EFF% = 12.6825%  12.68%.
WEB APPENDIX 6B SOLUTIONS

6B-1. PV continuous compounding Answer: b Diff: E

Chapter 6 - Page 94
 PV = FVn/ein = $100,000/e0.09(6) = $100,000/1.7160 = $58,275.

6B-2. FV continuous compounding Answer: a Diff: M

Daily compounding:
FV2 = PV (1 + 0.06/365)365(2) = $1,000(1.12749) = $1,127.49
Continuous compounding:
FV2 = PVein = $1,000(e0.059(2)) = $1,000(1.12524) = $1,125.24
Difference between accounts $ 2.25

6B-3. Continuous compounded interest rate Answer: a Diff: M

Calculate the growth factor using PV and FV which are given:

FVn = PV ein; $19,000 = $14,014 ei4
ei4 = 1.35579.

Take the natural logarithm of both sides:

i(4) ln e = ln 1.35579.
The natural log of e = 1.0.
Inputs: 1.35579. Press LN key. Output: LN = 0.30438.

i(4)ln e = ln 1.35579
i(4) = 0.30438
i = 0.0761 = 7.61%.

6B-4. Payment and continuous compounding Answer: d Diff: M

0. 07
0 I c = e 1 2 3 Ye ar s
I = 4% 2 4 6 6 - mo n t h s
s

| | | | | | | Pe r i o d s
Account with
continuous
compounding -1,000 FVc = ? = 1,233.70
Account with
semiannual
compounding PVs = ? FVs = ? = 1,233.70

Step 1: Calculate the FV of the $1,000 deposit at 7% with continuous compounding:

Using ex key:
Inputs: X = 0.21; press ex key. Output: ex = 1.2337.
FVn = $1,000 e0.07(3) = $1,000(1.2337) = $1,233.70.

Step 2: Calculate the PV or initial deposit:

Inputs: N = 6; I = 4; PMT = 0; FV = 1233.70.
Output: PV = -$975.01.

6B-5. Continuous compounding Answer: a Diff: M

Determine the effective annual rates.

Chapter 6 - Page 95
 (a) 12.5% annually = 12.5%.
2
 0.12 
(b) 12.0% semiannually = 1 +  - 1.0 = 0.1236 = 12.36%.
 2 

(c) 11.5% continuously = e0.115 - 1.0 = 0.1219 = 12.19%.

6B-6. Continuous compounding Answer: b Diff: M

Time line:
0 0. 10 1 10 Ye ar s
i = e
| |    |

PV = ? FV = 5, 438

Numerical solution:
(Constant e = 2.7183 rounded.)
$5,438 = PVe0.10(10)
$5,438 = PVe1
PV = $5,438/e
= $5,438/2.7183 = $2,000.52  $2,000.

Financial calculator solution:

Use eX exponential key on calculator. Calculate EAR with continuous compounding.
Inputs: X = 0.10; press ex key.
Output: ex = 1.1052.
EAR = 1.1052 - 1.0 = 0.1052 = 10.52%.
Calculate PV of FV discounted continuously
Inputs: N = 10; I = 10.52; PMT = 0; FV = 5438.
Output: PV = -$2,000.

6B-7. Continuous compounding Answer: d Diff: M

Numerical solution:
20
(0.04)(10)  i
e = 1 + 
 2
20
 i
e0.4 = 1 + 
 2
i
e0.02 =1+
2
i
1.0202 = 1 +
2
i
= 0.0202
2
i = 0.0404 = 4.04%.

6B-8. Continuous compounding Answer: b Diff: M

Chapter 6 - Page 96
 T i me Li ne:
0 i = 10. 52% 1 2 10 Ye ar s
| | |    |
PV = ? FV = 1, 000

Numerical solution:
$1,000 = PVe0.10(10) = PVe1.0
PV = $1,000/e = $1,000/2.7183 = $367.88  $368.

Financial calculator solution:

Use ex exponential key on calculator. Calculate EAR with continuous compounding.
Inputs: X = 0.10; press ex key. Output: ex = 1.1052.
EAR = 1.1052 - 1.0 = 0.1052 = 10.52%.

Calculate PV of FV discounting at the EAR:

Inputs: N = 10; I = 10.52; PMT = 0; FV = 1000.
Output: PV = -$367.78  $368.

6B-9. Continuous compounding Answer: b Diff: M

T i me Li ne:
0 i = 5. 127%
1 2 20 Ye ar s
| | |    |
PV = - 15, 000 FV = ?

Numerical solution:
FV20 = $15,000e0.05(20) = $40,774.23  $40,774.

Financial calculator solution:

(Note: We carry the EAR to 5 decimal places for greater precision in order to come closer to the
correct exponential solution.)
Inputs: X = 0.05; press ex key. Output: ex = 1.05127.
EAR = 1.05127 - 1.0 = 0.05127 = 5.127%.

Calculate FV compounded continuously at EAR = 5.127%

Inputs: N = 20; I = 5.127; PV = -15000; PMT = 0.
Output: FV = $40,773.38  $40,774.

Chapter 6 - Page 97