Note: For TVM questions, you are not required to show the work using equations if the questions
can be completed using TVM function in your calculator. You can simply specify the values for TVM
input (e.g., FV-, PMT=, etc.) and that will be counted as showing your work.
1. Compute the FV of simple and compounding interest for 10-year $100 investment that earns 5 percent
a year. Then, find the difference between the two FVs. [12 points]
2. A Citi bank bond promises to pay $105 in 4 years. Find the fair value (also called intrinsic value) of
this bond when the discount rate is 6 percent. Also, please answer if the market value of the bond today
is $85, is the bond overvalued or undervalued? [7 points]
3. Your client just turned 23 years old. She wants to begin saving for retirement, with the first payment
starting a year from now. She can save $8,000 per year, and you advise her to invest it in the stock
market, which you expect to provide an average return of 7.5% each year until she retires. [10 points]
a) If she follows your advice, how much money will she have at 60 when she retires? Assume she
also invests a one-time $3,000 today.
b) She expects to live for 30 years after she retires. If her investments earn 5% after her retirement,
how much will she be able to withdraw at each retirement age? She will have no money left in her
account when she makes her last withdrawal. Use part a) for her retirement fund.
4. You can only choose one of the three investment options below. Calculate the annual rate of return of
each option and choose the one with the highest annual rate of return. [17 points]
a.
Invest one-time $4,000 today and $7,300 at the end of each year for 9 years. You will
receive a one-time amount of $178,000 at the end of year 9.
b. Invest $8,300 every year for 9 years starting today. You will receive a one-time amount of
$140,000 at the end of year 9.
c. One-time $40,000 investment today and receive a one-time amount of $200,000 in 9 years.
5. You want to buy a house within 4 years, and you are currently saving for the down payment. You plan
to save $5,000, $5,500, $6,050, and $7,300 at the end of each year. Your expected annual return of your
savings each year is 7%. How much will you have for the down payment at the end of Year 4? [10
points]
