FIN 36053 Quiz #1 NAME: ___________________________ Example 1: There is an expected payment one year from today of $1000 and interest rates for the 1-year period are yielding 3%, what is the present value fo the future payment? PV = 1000 / (1 + .03)1 = 970.87 Example 2: A bank wants to increase deposits and is looking to increase their savings interest rate to achieve this goal. The bank wants to raise $1,000,000 through this program and is willing to pay 3.5% to achieve the goal. The bank expects to reduce this introductory offer in 3-years and thus all depositors will remove their funds from their account. How much will they have to pay out in interest to achieve their goal? FV = 1,000,000 * (1 +.035)3 =1,108,718 Interest = 108,718 1) In Example #1 what if the interest rate was 8%? 2) In Example #1 what if the interest rate was 5%? 3) In Example #1 what if the term was 5 years? 4) In Example #1 what if the term was 30 years? 5) In Example #2 what if the interest rate was 5%? 6) In Example #2 what if the interest rate was 8%? 7) In Example #2 what if the term was 5 years? 8) In Example #2 what if the term was 30 years? 9) In Example #2 how long could the bank in Example #2 keep the accounts active before paying $1,000,000 in interest? 10) In Example #2 what interest rate could the bank pay if they wanted to pay $1,000,000 in interest in 15 years?