(2.b) Time Value of Money

(1) You invest $2,000 in a three-year Certificate of Deposit (CD) bearing 4% annual interest. How much money will you have when the CD matures?

(2) What amount must you deposit today in a five-year CD bearing 6% interest to provide you with $5,000 at the end of the CDs maturity?

(3) You invest $5,000 today in a CD that pays 5% annual interest. If you leave your money invested in the CD for its entire maturity period, you will have $7,035.50. What is the CDs term to maturity?

(4) You invested $2,500 10 years ago in a 10-year CD. You just received word from you bank that the CD has matured and that you now have $7,764.62 in your account. What was the annual interest rate?

(5) What amount today deposited in a bank paying 6% annual interest would allow you to withdraw $2,500 at the end of each year for four years?

(6) What would happen to the value of perpetuity if prevailing interest rates decreased?

(7) What is the Present Value of the following cash flow stream at a 6 percent discount rate?

Year Cash Flow

• 200
• 100
• 50
• 500
• 750

i = 6%

(8) What is the Future Value of the above cash flow stream? (Hint: use only the PV you just calculated!)