Question 4
(a) You deposit RM5,000 each year in a savings account that pays 14 percent interest
annually, compounded semiannually. How much will your account be worth in 14
years? Recalculate if the saving account pays 14 percent interest annually,
compounded quarterly? Explain how does your present value and future value
change, if you earn a higher compounding for your investments?
(4 marks)
(b) You are given the following cash flows. What is the present value ($t = 0$) if the
discount rate is 12.5 percent?
(3 marks)
0
1
2
3
4
5
6
Periods
0
2,000 2,000 2,000 0 -2,000
RM
(c) Assume you are to receive a 28-year annuity with annual payments of RM50. The
first payment will be received at the beginning of Year 1, and the last payment will be
received at the end of Year 28. You will invest each payment in an account that pays
9.5 percent. What will be the value in your account at the end of Year 35? (3 marks)
(d) You are contributing money to an investment account so that you can purchase a
house in five years. You plan to contribute six payments of RM3,400 a year. The
first payment will be made today ($t = 0$), and the final payment will be made five
years from now ($t = 5$). If you earn 11.5 percent in your investment account, how
much money will you have in the account five years from now (at $t = 5$)? (5 marks)
