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# Tutorial 3 - Basic Finance

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- Basic Finance

- Basic Finance

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• 1. BWFF1013 FOUNDATIONS OF FINANCE (A112) NAME: ____________________________ ( ) TUTORIAL 3 TOPIC: TIME VALUE OF MONEYPART A: CONCEPTUAL1. On the right are 6 diagrams representing 6 different present and future value concepts stated on the left. Identify the diagrams with the concepts by writing the identifying letter of the diagram on the blank line at the left. (See Example A) Concept Diagram of ConceptDiagram e_ A. Future value ? \$1 a. | | | | |_________ B. Present value ?_________ C. Future value of an annuity due \$1 \$1 \$1 \$1 b. |- - - - | | | |_________ D. Future value of an ordinary annuity ?_________ E. Present value of an ordinary annuity \$1 \$1 \$1 \$1 c. | | | |- - - - |_________ F. Present value of an ordinary due ? \$1 \$1 \$1 \$1 d. | | | | | \$1 ? e. | | | | | \$1 \$1 \$1 \$1 ? f. | | | |2. Match the following with the items below: a. Annuity b. Future value of an annuity due c. Discount rate d. Perpetuity e. Present value f. Semi-annual compounding i. __________ The payment of an equal stream of cash at the beginning of year into a fund which increases in size up to a future point in time. ii. __________The interest or return is accumulated every six months.WRMAS 1
• 2. BWFF1013 FOUNDATIONS OF FINANCE (A112) NAME: ____________________________ ( ) iii. __________ The discounted value of a future sum or annuity as of todays value. iv. __________ A series of consecutive payments or receipts of an equal amount. v. __________ The percentage rate at which future sums or annuities are brought back to their present value. vi. __________ A constant stream of identical cash flows with no maturity.3. Explain the importance of the time value of money and how it is related to an investor’s opportunity costs.4. Define compound interest and explain how it works.5. Would you rather have a saving account that pays 10% interest compounded semiannually or one that pays 10% interest compounded daily? Why?6. What effect would a decrease in the interest rate have on the future value? What effect would an increase in the holding period have on the future value? Discuss.7. What effect does increasing the interest rate have on the present value of a future value? Why?8. Differentiate between an ordinary annuity and an annuity due. Which one is more valuable? Why?PART B: CALCULATION1. Suppose that you invest RM100 into your bank account today, the interest rate is 8% annually a. How much will you have in 3 years if the bank compounds interest annually? b. How much will you have in 3 years if the bank compounds interest semiannually? c. What can you explain about the relationship between Questions (a) and (b)? d. How much will you have in 3 years if the bank increases the interest rate to 10% semiannually? What can you explain when the interest rate increases. e. If you plan to have RM1,000 in your bank account in 3 years, the interest rate is 8% annually, how much do you have to deposit today?WRMAS 2