# Solutions Finance I

## Solutions Finance I

Solutions to Textbook Recommended Problems
4-1.

You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs
\$5000. You plan to put down \$1000 and borrow \$4000. You will need to make annual payments
of \$1000 at the end of each year. Show the timeline of the loan from your perspective. How would
the timeline differ if you created it from the bank’s perspective?
0

1

2

3

4

5

4000

–1000

–1000

–1000

–1000

–1000

From the bank’s perspective, the timeline is the same except all the signs are reversed.
4-3.

Calculate the future value of \$2000 in
a.

Five years at an interest rate of 5% per year.

b. Ten years at an interest rate of 5% per year.
c.

Five years at an interest rate of 10% per year.

d. Why is the amount of interest earned in part (a) less than half the amount of interest earned
in part (b)?
a.

Timeline:
0

1

2

5

2000

FV= ?

FV5 = 2, 000 × 1.055 = 2, 552.56

b.

Timeline:
0

1

2

10

2000

FV=?

FV10 = 2, 000 × 1.0510 = 3, 257.79

c.

Timeline:
0

1

2000

2

5

FV= ?

FV5 = 2, 000 × 1.15 = 3, 221.02

d.

Because in the last 5 years you get interest on the interest earned in the first 5 years as well as
interest on the original \$2,000.

1

4-4.

What is the present value of \$10,000 received
a.

Twelve years from today when the interest rate is 4% per year?

b. Twenty years from today when the interest rate is 8% per year?
c.

Six years from today when the interest rate is 2% per year?

a.

Timeline:
0

1

2

3

12

PV=?
PV =

10, 000
12

10,000
= 6, 245.97

1.04

b.

Timeline:
0

1

2

3

20

PV=?
PV =

10, 000
1.08

c.

20

Timeline:
0

10,000
= 2,145.48

1

2

3

4

5

PV=?
PV =

10,000

10, 000
1.02

4-6.

6

6

= 8, 879.71

Consider the following alternatives:
i.