Tutorial Set 1 Week 1 Solutions

BFW 2631FINANCIAL MANAGEMENT

TUTORIAL SET 1 –WEEK 1FINANCIAL MATHEMATICS

Important note to students: It is your responsibility to familiarize yourself with your own personal calculator. Teaching staff are familiar with the Sharp EL735 and Sharp EL738 Business Financial Calculator. Assistance will be provided with the Sharp EL735/EL738 calculator in teaching materials. If you are using any other model then you must learn how to use them yourself. Do not leave learning the calculator until the last minute. You are also required to attempt all tutorial questions on your own prior to attending class.

Question 1 Hin Liang is investing $7,500 in a bank term deposit that pays 6.5% annual interest. If the interest earned every year is reinvested in the deposit account. Complete the table below to see how the initial investment grows over the five-year period.

Year Balance at Beginning of Year

Interest Balance at end of year

1 $7,500$487.5 $7,987.5

27,,987.5 519.19 8,506.69

38,506.69 552.93 9,059.62

49,059.62 588.88 9,648.50

59,648.50 627.15 10,275.65

a. What will Hin Liang’s investment be worth at the end of five years? FV5= $10,275.65

b. Based on your calculation above, briefly explain whether the interest earned on the investment is simple interest or compound interest.

It is compound interest since interest is calculated not only on the principal amount but also on the accumulated interest.

c. In the context of the above example, explain what you understand by the term reinvestment risk.

The risk resulting from the fact that interest earned from an investment may not be able to be reinvested in such a way that they earn the same rate of return as the invested funds that generated them. For example, falling interest rates may prevent the interest payments from earning the same rate of return as the principal investment.

Question 2 Calculate the missing values in the following table

Number of Years

Interest Rate (%) Present Value($) Future Value($)

N (%) PV FV30 12 225016 9 93105 4 14,45115 20 550,1643 265 3079 360 761

6 400 8009 40,000 120,000

Note: You have to how to use the formulas and the calculator to obtain the missing values

Solution2(i) FV =PV (1+i ) N=$2250(1+0.12)30=$ 67,409.82

Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]

Values Function Keys Display on Calculator Screen

30 [N]

67409.82

2,250 [±] [PV]

12 [I/Y]

[COMP] [FV]

2(ii) FV =PV (1+i ) N=$ 9310 (1+0.09)16=$ 36,963.55



16 [N]

36963.559310 [±] [PV]

9 [I/Y]

[COMP] [FV]

2(iii)PV = FV

(1+i)N=$ 14 , 451

(1 . 04 )5=

$11,877.67



5 [N]

-11877.6714451 [FV]

4 [I/Y]

[COMP] [PV]

2(iv)PV= FV

(1+i)N=$55 ,0164

(1.20 )15=

$35,708.65



15 [N]

-35708.65

550164 [FV]

20 [I/Y]

[COMP] [PV]

2(v)

FV =PV (1+i)N

i=[ FVPV ]

1/N

−1= [ $307$265 ]

(1/3 )

−1 = 0.0503 or 5.03%



3 [N]

5.03265 [±] [PV]

307 [FV]

[COMP] [I/Y]

2(vi) FV =PV (1+i)N

i=[ FVPV ]

1/N

−1=

[ $761$360 ]

(1/9 )

−1 = 0.0867 or 8.67%



9 [N]

8.67

360 [±] [PV]

761 [FV]

[COMP] [I/Y]

2(vii) FV =PV (1+i)N N=ln [ FV

PV ]ln (1+i) =

ln [ $ 800$ 400 ]

ln (1+0. 06 )= 0 .6931

0 .0583=11.89

years


Values Function Keys Display on Calculator Screen800 [FV]

11.90400 [±] [PV]6 [I/Y]

[COMP] [N]

2(viii) FV =PV (1+i)N N=ln [ FV

PV ]ln (1+i) =

ln [ $ 120 ,000$ 40 , 000 ]

ln (1+0. 09 )= 1.0986

0 .0862=12 .75

years


Values Function Keys Display on Calculator Screen120000 [FV]

12.7540000 [±] [PV]

9 [I/Y][COMP] [N]

Tutorial Set 1 Week 1 Solutions

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