Chapter 2.

Ch 02 P 26 Build a Model
a. Find the FV of $1,000 invested to earn 10% after 5 years.
Inputs:

Formula:

PV =
i =
n =
FV = PV(1+I)^n =

1000
10%
5
$

1,610.51

b. Find the PV of $1,000 due in 5 years if the discount rate is 10%.

Inputs:

FV =
i =
n =
PV = FV/(1+I)^n =

Formula:

1000
10%
5
$

620.92

c. A security has a cost of $1,000 and will return $2,000 after 5 years. What rate of return does the
security provide?
Inputs:

PV =
FV =
i =
n =

-1000
2000
?
5

Wizard (Rate):

14.87%

Note: Use zero for Pmt since there are no periodic payments. Note that the PV is given a
negative sign because it is an outflow (cost to buy the security).
d. Suppose Californias population is 30 million people, and its population is expected to grow by 2%
per year. How long would it take for the population to double?
Inputs:

PV =
FV =
i = growth rate
n =

-30
60
2%
?

Wizard (NPER):

35.00

= Years to double.

e. Find the PV of an annuity that pays $1,000 at the end of each of the next 5 years if the interest rate
is 15%. Then find the FV of that same annuity.
Inputs:

PV: Use function wizard (PV)

Pmt
n
i

PV =

1,000
5
15%
-$3,352.16

FV: Use function wizard (FV)

FV =

-$6,742.38

f. How would the PV and FV of the annuity change if it were an annuity due rather than an ordinary
annuity?
For the PV, each payment would be received one period sooner, hence would be discounted back one
less year. This would make the PV larger. We can find the PV of the annuity due by finding the PV of
an ordinary annuity and then multiplying it by (1 + i).
PV annuity due =

-$3,352.16

115%

-$3,854.98

115%

-$7,753.74

Exactly the same adjustment is made to find the FV of the annuity due.
FV annuity due =

-$6,742.38

g. What would the FV and the PV for problems a and c be if the interest rate were 10% with
semiannual compounding rather than 10% with annual compounding?
Part a. FV with semiannual compounding:
Inputs:
PV =
i =
n =
Formula:
FV = PV(1+I)^n =

Orig. Inputs:
1000
10%
5
($1,610.51)

New Inputs:
1000
5%
10
($1,628.89)

Part c. PV with semiannual compounding:

Inputs:

Orig. Inputs:
1000
10%
5
($620.92)

New Inputs:
1000
5%
10
($613.91)

Formula:

FV =
i =
n =
PV = FV/(1+I)^n =

h. Find the PV and the FV of an investment that makes the following end-of-year payments. The
interest rate is 8%.
Year
1
2
3

Payment
100
200
400
Rate =

To find the PV, use the NPV function:

8%
PV =

$581.59

Excel does not have a function for the sum of the future values for a set of uneven payments.
Therefore, we must find this FV by some other method. Probably the easiest procedure is to simply
compound each payment, then sum them, as is done below. Note that since the payments are received
at the end of each year, the first payment is compounded for 2 years, the second for 1 year, and the
third for 0 years.

Year
1
2
3

Payment
100
200
400

(1 + I )^(n-t)
1.17
1.08
1.00

Sum =

FV
116.64
216.00
400.00
$

732.64

An alternative procedure for finding the FV would be to find the PV of the series using the NPV
function, then compound that amount, as is done below:
PV =
FV of PV =

$581.59
732.64

i. Suppose you bought a house and took out a mortgage for $50,000. The interest rate is 8%, and
you must amortize the loan over 10 years with equal end-of-year payments. Set up an amortization
schedule that shows the annual payments and the amount of each payment that goes to pay off the
principal and the amount that constitutes interest expense to the borrower and interest income to
the lender.
Original amount of mortgage:
Term of mortgage:
Interest rate:

50000
10
0.08

Annual payment (use PMT function):

Year
1
2
3
4
5
6
7
8
9
10

Beg. Amt.
$50,000.00
$46,548.53
$42,820.94
$38,795.15
$34,447.29
$29,751.60
$24,680.26
$19,203.21
$13,288.00
$6,899.57

Pmt
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47
$7,451.47

-$7,451.47

$
$
$
$
$
$
$
$
$
$

Interest
4,000.00
3,723.88
3,425.68
3,103.61
2,755.78
2,380.13
1,974.42
1,536.26
1,063.04
551.97

Principal
$3,451.47
$3,727.59
$4,025.79
$4,347.86
$4,695.69
$5,071.34
$5,477.05
$5,915.21
$6,388.43
$6,899.50

End. Bal.
$46,548.53
$42,820.94
$38,795.15
$34,447.29
$29,751.60
$24,680.26
$19,203.21
$13,288.00
$6,899.57
$0.06

ii. Suppose the loan called for 10 years of monthly payments, with the same original
amount and the same nominal interest rate. What would the amortization schedule show
now?
Now we would have a 12*10 = 120 payment loan at a monthly rate of .08/12 = 0.666667%.
The monthly payment would be:
($606.64)
Month
1 $
2 $

Beg. Amt.
50,000.00 $
49,726.69 $

Pmt
606.64
606.64

$
$

Interest
Principal
End. Bal.
333.33 $
273.31 $
49,726.69
331.51 $
275.13 $
49,451.56

3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

49,451.56
49,174.60
48,895.79
48,615.12
48,332.59
48,048.16
47,761.84
47,473.62
47,183.47
46,891.38
46,597.35
46,301.36
46,003.40
45,703.45
45,401.50
45,097.53
44,791.54
44,483.51
44,173.43
43,861.28
43,547.05
43,230.72
42,912.29
42,591.73
42,269.03
41,944.19
41,617.17
41,287.98
40,956.60
40,623.00
40,287.18
39,949.12
39,608.81
39,266.23
38,921.36
38,574.20
38,224.72
37,872.91
37,518.76
37,162.24
36,803.35
36,442.07
36,078.37
35,712.25
35,343.70
34,972.68
34,599.19
34,223.21
33,844.73
33,463.72

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

329.68
327.83
325.97
324.10
322.22
320.32
318.41
316.49
314.56
312.61
310.65
308.68
306.69
304.69
302.68
300.65
298.61
296.56
294.49
292.41
290.31
288.20
286.08
283.94
281.79
279.63
277.45
275.25
273.04
270.82
268.58
266.33
264.06
261.77
259.48
257.16
254.83
252.49
250.13
247.75
245.36
242.95
240.52
238.08
235.62
233.15
230.66
228.15
225.63
223.09

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

276.96
278.81
280.67
282.54
284.42
286.32
288.23
290.15
292.08
294.03
295.99
297.96
299.95
301.95
303.96
305.99
308.03
310.08
312.15
314.23
316.33
318.44
320.56
322.70
324.85
327.01
329.19
331.39
333.60
335.82
338.06
340.31
342.58
344.87
347.16
349.48
351.81
354.15
356.51
358.89
361.28
363.69
366.12
368.56
371.02
373.49
375.98
378.49
381.01
383.55

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

49,174.60
48,895.79
48,615.12
48,332.59
48,048.16
47,761.84
47,473.62
47,183.47
46,891.38
46,597.35
46,301.36
46,003.40
45,703.45
45,401.50
45,097.53
44,791.54
44,483.51
44,173.43
43,861.28
43,547.05
43,230.72
42,912.29
42,591.73
42,269.03
41,944.19
41,617.17
41,287.98
40,956.60
40,623.00
40,287.18
39,949.12
39,608.81
39,266.23
38,921.36
38,574.20
38,224.72
37,872.91
37,518.76
37,162.24
36,803.35
36,442.07
36,078.37
35,712.25
35,343.70
34,972.68
34,599.19
34,223.21
33,844.73
33,463.72
33,080.17

53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

33,080.17
32,694.07
32,305.39
31,914.12
31,520.24
31,123.73
30,724.58
30,322.77
29,918.29
29,511.10
29,101.20
28,688.57
28,273.19
27,855.03
27,434.09
27,010.35
26,583.78
26,154.36
25,722.09
25,286.93
24,848.87
24,407.88
23,963.96
23,517.08
23,067.22
22,614.37
22,158.49
21,699.57
21,237.59
20,772.54
20,304.38
19,833.10
19,358.69
18,881.10
18,400.34
17,916.37
17,429.17
16,938.72
16,445.01
15,948.00
15,447.68
14,944.03
14,437.01
13,926.62
13,412.82
12,895.60
12,374.93
11,850.79
11,323.16
10,792.01

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

220.53
217.96
215.37
212.76
210.13
207.49
204.83
202.15
199.46
196.74
194.01
191.26
188.49
185.70
182.89
180.07
177.23
174.36
171.48
168.58
165.66
162.72
159.76
156.78
153.78
150.76
147.72
144.66
141.58
138.48
135.36
132.22
129.06
125.87
122.67
119.44
116.19
112.92
109.63
106.32
102.98
99.63
96.25
92.84
89.42
85.97
82.50
79.01
75.49
71.95

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

386.11
388.68
391.27
393.88
396.51
399.15
401.81
404.49
407.18
409.90
412.63
415.38
418.15
420.94
423.75
426.57
429.41
432.28
435.16
438.06
440.98
443.92
446.88
449.86
452.86
455.88
458.92
461.98
465.06
468.16
471.28
474.42
477.58
480.77
483.97
487.20
490.45
493.72
497.01
500.32
503.66
507.01
510.39
513.80
517.22
520.67
524.14
527.63
531.15
534.69

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

32,694.07
32,305.39
31,914.12
31,520.24
31,123.73
30,724.58
30,322.77
29,918.29
29,511.10
29,101.20
28,688.57
28,273.19
27,855.03
27,434.09
27,010.35
26,583.78
26,154.36
25,722.09
25,286.93
24,848.87
24,407.88
23,963.96
23,517.08
23,067.22
22,614.37
22,158.49
21,699.57
21,237.59
20,772.54
20,304.38
19,833.10
19,358.69
18,881.10
18,400.34
17,916.37
17,429.17
16,938.72
16,445.01
15,948.00
15,447.68
14,944.03
14,437.01
13,926.62
13,412.82
12,895.60
12,374.93
11,850.79
11,323.16
10,792.01
10,257.31

103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120

$ 10,257.31 $
$
9,719.05 $
$
9,177.21 $
$
8,631.75 $
$
8,082.65 $
$
7,529.90 $
$
6,973.46 $
$
6,413.31 $
$
5,849.42 $
$
5,281.78 $
$
4,710.35 $
$
4,135.11 $
$
3,556.04 $
$
2,973.11 $
$
2,386.29 $
$
1,795.56 $
$
1,200.89 $
$
602.25 $

606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64
606.64

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

68.38
64.79
61.18
57.54
53.88
50.20
46.49
42.76
39.00
35.21
31.40
27.57
23.71
19.82
15.91
11.97
8.01
4.02

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

538.26
541.85
545.46
549.10
552.76
556.44
560.15
563.88
567.64
571.43
575.24
579.07
582.93
586.82
590.73
594.67
598.63
602.62

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

9,719.05
9,177.21
8,631.75
8,082.65
7,529.90
6,973.46
6,413.31
5,849.42
5,281.78
4,710.35
4,135.11
3,556.04
2,973.11
2,386.29
1,795.56
1,200.89
602.25
(0.37)