Chapter 6

Question 0

What does the I/YR button on the calculator mean?

Answer 0

Interest rate per year

Question 1

What does the N key on the calculator mean?

Answer 1

Number of periods

Question 2

What does the PV button on the calculator mean?

Answer 2

Present value

Question 3

What does the FV button on the calculator mean?

Answer 3

Future value

Question 4

Calculate FV of a single sum

Ex. 30k lump sum to invest today. Compound annual interest of 6%. What will the FV be in 5 years?

Answer 4

[SHIFT] C ALL

$30000 +/- PV (enters the PV. should be negative)

6 I/YR (interest rate)

5 N (number of years)

FV (shows solution) $40,147

Or

FV = PV * (1 + i)^n

Or
PV * FV factor

Question 5

How is the effective interest calculated?

Nominal interest rate of 6

12 payments per year

Answer 5

[SHIFT] DISP 4 (4 decimals)

6 [SHIFT] NOM % (enters nominal rate)

12 [SHIFT] P/YR (sets 12 payments)

SHIFT EFF % (determines effective interest rate)

Question 6

I want to have $15,000 to buy a boat in 5 years. I want to deposit money in a savings account earning 3% compound interest. How much do I have to deposit today?
(Present value)

Answer 6

$15,000 FV
3 I/YR
5 N
PV = $12,939

Question 7

Phil wants to have $10k in 7 years to buy a jeep. He has $6,000 to deposit today. How much interest is needed?

Answer 7

Clear calculator 
-$6000 PV
$10000 FV
7 N
I/YR
= 7.57

Question 8

What is an annuity?

Answer 8

Constant cash flow amount saved or received

Question 9

Annuity where payments are received at the end of each period?

Answer 9

Ordinary

Question 10

Future value of annuity calculation:
Phil will deposit $1k, annually, for 4 years. First deposit will be made in one year.

If 5% compound interest, how much will be in account in 4 years?

Answer 10

1) Clear calculator
2) [SHIFT] BEG/END (if BEGIN is displayed)

3) 1000 +/- PMT (-$1k as payment)
4) 5 I/YR (int rate)
5) 4 N (4 years)
6) FV (solves $4310)

Question 11

Present Value of Annuity

Phil will get a $5k ordinary annuity at end of each year for next 10 years. Assuming an interest rate of 5% what is the annuity worth now.

Answer 11

1) Make sure doesn’t display BEGIN
2) 5000 PMT
3) 5 I/YR
4) 10 N
5) PV ($38608)

Question 12

Payment required (Phil needs to have $10,000,000 in 4 years to buy a mansion. He will make 4 annual deposits at the end of the year at 8% annual interest. How much do the deposits need to be?

Answer 12

1) Clear
2) make sure not set to BEG
3) 10000000 FV
4) 8 I/YR
5) 4 N
6) PMT (2,219,208)

Question 13

Annuity in which payments are received at the beginning of each period. (Make sure to set calc to BEGIN mode)

Answer 13

Annuity due

Question 14

Provide an example of an annuity due.

Answer 14

Amounts payable under life insurance

Question 15

How can you concert the PV of an ordinary annuity to an annuity due?

Answer 15

Multiply ordinary annuity PV By (1+i)

Question 16

How can you convert the PV of an annuity due to an ordinary annuity.

Answer 16

Divide by (1+i)

Question 17

Present value of an annuity. Tom will get $5k at begin of year for 10 yrs. INT 5%. What is PV

Answer 17

Clear
Make sure says BEG
5000 PMT
10 N
5 I/YR
PV (40539)

Question 18

A stream of payments that continues indefinitely. Ex. Dividends on preferred stock or real estate income.

Answer 18

Perpetuity

Question 19

How to calculate perpetuity.

Answer 19

PV = payment / capitalization rate (int rate)

Question 20

Phil wants to buy a lakefront vacation rental property. It will generate annual income of $12500 per year. Phil wants 14% return. What is current value of property?

Answer 20

89286

Question 21

How is the present value of unequal cash flows determined?

If using a calculator which button is used to calculate multiple unequal cash flows?

Answer 21

Add the present values of the individual cash flows.

CFj to enter payments and NPV to get the value

Question 22

What is the name for the present value of unequal payments?

Answer 22

Net present value

Question 23

What does it mean if the NPV os positive?

Answer 23

The investment’s rate of return exceeds the discount rate.

Question 24

Discount rate is 8%. What is the NPV of the following cash flow structure?

Initial: $250
End yr 1: $125
End yr 2: $100
End yr 3: $80

Answer 24

0 CFj
125 CFj
100 CFj
80 CFj
8 I/YR
NPV = 260,351.57

Question 25

If compounding occurs annually, the effective interest rate will be higher than/lower than/the same as the effective interest rate?

Answer 25

The same as