# 3.1 Compounding - Solutions

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## 3.1 Compounding - Solutions

Pages:
12
School:
University of Texas at Austin
Course:
Fin 320f - Foundations of Finance
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Unformatted text preview:

End of period: 012345 End of period: 0123456…19202122232425 FIN 320F Foundations of Finance 3.1 Compounding – Solutions 1. If I put \$10,000 in the bank today, and earn annual interest of 4%, compounded annually, how much will I have in my account in five years’ time? PV = \$10,000 FV = ? PV = \$10,000 in the bank today r = 4% per year n = 5 years m = 1 compounding per year Using a financial calculator: Using the formula: N = 5 × 1 I% = 4 ÷ 1 PV = 10000 PM T = 0 FV = AL PH A EN TE R = -12166.53 2. My grandfather died 25 years ago and left me \$15,000. If I had invested the money at an annual rate of 9%, compounded annually, how much would I have today? PV = \$15,000 FV = ? PV = \$15,000 r = 9% per year n = 25 years (from 25 years ago until today) m = 1 compounding per year Using a financial calculator: Using the formula: N = 25 × 1 I% = 9 ÷ 1 SourceDocument.docx Page 1 of 12 ©HToprac 2015-2022 53 . 166 , 12 \$ FV 216653 .1 000 , 10 \$ FV 1 5 1 04 . 1 000 , 10 \$ FV m n m r 1 PV FV                    1 \$129,346.2 FV 62308066 .8 \$15,000 FV 1 25 1 .09 1 \$15,000 FV m n m r 1 PV FV                    FIN 320F Foundations of Finance 3.1 Compounding – Solutions PV = 15000 PM T = 0 FV = AL PH A EN TE R = -129346.21 SourceDocument.docx Page 2 of 12 ©HToprac 2015-2022 Age: 22232425262728…64656667686970 End of period: 0123456…42434445464748 End of period: 012345678910 FIN 320F Foundations of Finance 3.1 Compounding – Solutions 3. If you earn a gross salary of \$50,000 when you are 22 years old, and are awarded a 4% salary increase each year, what will be your annual gross salary when you are 70? PV = \$50,000 FV = ? PV = \$50,000 r = 4% per year (See Note) n = 48 years (from age 22 to age 70) m = 1 compounding per year (because you get one raise per year) N = 48 × 1 I% = 4 ÷ 1 PV = 50000 PM T = 0 FV = AL PH A EN TE R = -328526 Note: A survey of 1,046 U.S. companies conducted by Towers Watson Data Services found that companies planned to award merit increases of 2.9% for 2013, a slight increase from the 2.8% raise workers received in 2012 and the 2.7% they received in 2011. Source: http://www.towerswatson.com/united-states/press/7856. 4. Your credit card company charges a rate of 21%, compounded monthly, on all outstanding balances. If you ...

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