Applying the Concepts of Time Value of Money

1. Which of the following would you rather have if your rate of discount is 20 percent?

P300 in one year

P350 in two year

P420 in three years

P1,500 in ten years

2. What is the future value of a 5-year ordinary annuity with annual payments of P200, evaluated at a 15%

interest rate?

3. Justine now has P125. How much would she have after 8 years if she leaves it invested at 8.5% with

annual compounding?

4. You plan to invest an amount of money in five-year certificate of deposit (CD) at your bank. The stated

interest rate applied to the CD is 12%, compounded monthly. How much must you invest if you want

the balance in the CD account to be P8,500 in five years?

5. Consider a one-year discount bond that pays P1,000 one year from now. If the rate of discount is 7%,

what is the present value of the bond?

6. Consider a one-year discount bond that has a present value of P1,000. If the rate of discount is 7%, what

is the future value of the bond (the amount the bond pays in one year)?

7. Your favorite TV show, Netflix, offers you four different subscription deals for the next four years. It has

guaranteed its current and future subscription rates, as shown below:

A. A one-year subscription for P24, followed by a one-year renewal each year for P24 each year.

B. A two-year subscription for P45, followed by a two-year renewal for P48.

C. A three-year subscription for P72, followed by a one-year renewal for P24.

D. A four-year subscription for P89.

Which will you take, if your rate of discount is 6% and you want to subscribe to Netflix for four years?

8. You borrow P100,000 for 5 years to pay tuition and fees. The annual interest rate of 5%, with payments

to be made monthly. What monthly payment would be required to pay off the loan?

9. You expect to receive P1,000 at the end of each of the next 3 years. You will deposit these payments

into an account which pays 10%, compounded semiannually. What is the future value of these

payments, that is, the value at the end of the third year?

10. A young couple buys their dream house. After paying their down payment and closing costs, the couple

has borrowed P400,000 from the bank. The terms of the mortgage are 30 years of monthly payments

at the required rate of return at 6% with monthly compounding. What is the monthly payment for the

couple?