Integrative Problem
Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank’s evaluation process, you have been asked to take an examination that covers several financial analysis techniques. The first section of the test addresses time value of money analysis. See how you would do by answering the following questions:
a. (1) What is the future value of an initial $100 after three years if it is invested in an account paying 10%annual interest?
(2) What is the present value of $100 to be received in three years if the appropriate interest rate is 10%?
b. We sometimes need to find how long it will take a sum of money (or anything else) to grow to some specified amount. For example, if a company’s sales are growing at a rate of 20%per year, approximately how long will it take sales to triple?
c. (1) What is the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10%?
(2) What is the present value of the annuity?
(3) What would the future and present values be if the annuity were an annuity due?
d. What is the present value of the following uneven cash flow stream? The appropriate interest rate is 10%, compounded annually.

0 1 2 3 4
______________I____I___I____I_____I

100 300 300 150

e. What annual interest rate will cause $100 to grow to $125.97 in 3 years?
f. Will the future value be larger or smaller if we compound an initial amount more often than annually—for example, every 6 months, or semiannually—holding the stated interest rate constant? Why?
g. (1) Construct an amortization schedule for a $1,000 loan that has a 10% annual interest rate that is repaid in three equal installments.
(2) What is the annual interest expense for the borrower, and the annual interest income for the lender, during Year 2?
h. Suppose on January 1 you deposit $100 in an account that pays a simple, or quoted, interest rate of 11.33463%, with interest added (compounded) daily. How much will you have in your account on October 1, or after 9 months?
i. Now suppose you leave your money in the bank for 21 months. Thus, on January 1 you deposit $100 in an account that pays a 11.33463% compounded daily. How much will be in your account on October 1 of the following year?
j. Suppose someone offered to sell you a note that calls for a $1,000 payment 15 months from today. The person offers to sell the note for $850. You have $850 in a bank time deposit (savings instrument) that pays a 6.76649%simple rate with daily compounding, which is a 7%effective annual interest rate; and you plan to leave this money in the bank unless you buy the note. The note is not risky—that is, you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (1) by comparing your future value if you buy the note versus leaving your money in the bank, (2) by comparing the PV of the note with your current bank investment, and (3) by comparing the rEAR on the note with that of the bank investment.

Integrative Problem Assume that you are nearing graduation and tha...