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?