Long Term Time Value of Money Practice Questions 1

More Time Value of Money Tutorials Compounding Interest Monthly, Quarterly, Semi-Annually or Monthly Short Term Time Value of Money Real and Nominal Interest Rates Long Term Time Value of Money Practice Questions 1 Long Term Time Value of Money Practice Questions 2

Note: In order to do these questions, we are not using formulas (which can be very lengthy and not efficient in the workplace. Instead we use the Business Analyst Financial Calculator BA II Plus. Get one if you don't have it, it will definitely serve you well in all your Finance courses!

 

1) N = The number of periods

If it says an investment is for 3 years with "monthly" payments (in our out) , then the # of periods N = 3 years x 12 months = 36

If investment is for 3 years with "quarterly" payments , then # of periods N = 3 years x 4 months = 12

If investment is for 3 years with "semi-annual" payments, then # of periods N = 3 years x 2 months = 6

If investment is for 3 years with "annual" payments, then # of periods N = 3 years x 1 = 3

2) I/Y = Stated Nominal Interest Rate

In order to convert between effective and nominal interest rates, you can either do it using the formulas or use the financial calculator. We recommend using the calculator as it is efficient and used in the workplace.

- In the calculator, press "2nd" and then "2" or "ICONV."
- "ICONV" stands for Interest Conversion
- Enter the nominal rate in the "Nom = "
- Press Enter and hit the Down Arrow Key
- Enter the C/Y meaning Compounding Per Year.
- In the "Eff = ", press Compute and you will get your answer.

3) Present Value = Worth of Investment NOW

Refers to how much an investment is worth today. Therefore from the example above, if i invest $5000 today, the Present Value (PV) is $5000. The future value in 5 years is $29,010.

4) PMT = Any cash flows paid in our out.

If a cash flow is paid in, then it is called a "Contribution" and should be entered with a +. Example if an investor contributes 500$ a month into an investment, then the PMT = +500

If a cash flow is paid out, then it is called a "withdrawal" and should be entered with a -. Example if an investor withdraws 500$ a month from his investment plan, then the PMT = -500

5) Future Value = Worth of Investment in the Future

Refers to how much an investment grows over a certain period of time. Example $5000 invested today grows to over $29,010 in 5 years of time with an interest rate of 5% compounded annually.

6) P/Y = Periods Per Year

If payments are monthly, then P/Y = 12
If payments are quarterly, then P/Y = 4
If payments are semi-annual, then P/Y = 2
If payments are annual, then P/Y = 1

7) C/Y = Compounding Periods Per Year

If investment interest rate is compounded monthly, then C/Y = 12
If investment interest rate is compounded quarterly, then C/Y = 4
If investment interest rate is compounded semi-annually, then C/Y = 2
If investment interest rate is compounded annually, then C/Y = 1

8) BGN = Beginning of Period Calculations

Most of the questions you do are payments that are made at the ending of a period. What about those payments that are made at the BEGINNING of the period? Consider these two scenarios:

1) "A debt of $41000 is repaid by making payments of $3750 at the start of each year..." Notice the "start of each year" in bold, this means the BGN on your calculator must be TURNED ON!

2) "A debt of $41000 is repaid by making payments of $3750." - It doesn't say "start or beginning" anywhere, so this means keep your BGN TURNED OFF!

How to turn on BGN -> 2nd, PMT, 2nd, Enter
How to turn off BGN -> 2nd, PMT, 2nd, Enter

Try punching these in your calculator to a feel for how this works. Once you learn the data entry of these variables, you will like the calculator!

Long Term Time Value of Money Practice Questions 1