Description
Start with the partial model. Build a Model.xlsx from the textbook’s Web site. Answer the following questions, using the spreadsheet model to do the calculations.
a. Find the FV of $1,000 invested to earn 10% annually 5 years from now. Answer this question first by using a math formula and then by using the Excel function wizard.
b. Now create a table that shows the FV at 0%, 5%, and 20% for 0, 1, 2, 3, 4, and 5 years. Then create a graph with years on the horizontal axis and FV on the vertical axis to display your results.
c. Find the PV of $1,000 due in 5 years if the discount rate is 10% per year. Again, first work the problem with a formula and then by using the function wizard.
d. A security has a cost of $1,000 and will return $2,000 after 5 years. What rate of return does the security provide?
e. Suppose California’s 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?
f. Find the PV of an ordinary 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.
g. How would the PV and FV of the above annuity change if it were an annuity due rather than an ordinary annuity?
h. What would the FV and PV for parts a and c be if the interest rate were 10% with semiannual compounding rather than 10% with annual compounding?
i. Find the PV and FV of an investment that makes the following end-of-year payments. The interest rate is 8%.
Year Payment
1 $100
2 $200
3 $400
j. 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 repays the principal and the amount that constitutes interest expense to the borrower and interest income to the lender.
(1) Create a graph that shows how the payments are divided between interest and principal repayment over time.
(2) Suppose the loan called for 10 years of monthly payments, 120 payments in all, with the same original amount and the same nominal interest rate. What would the amortization schedule show now?
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Explanation & Answer

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Solution
Chapter:
Problem:
4
35
a. Find the FV of $1,000 invested to earn 10% annually 5 years from now. Answer this
question by using a math formula and also by using the Excel function wizard.
Inputs:
PV =
1000
I/YR =
10%
N =
5
Formula:
FV = PV(1+I)^N =
$ 1,610.51
Wizard (FV):
$1,610.51
b. Now create a table that shows the FV at 0%, 5%, and 20% for 0, 1, 2, 3, 4, and 5
years. Then create a graph with years on the horizontal axis and FV on the vertical axis
to display your results.
Begin by typing in the row and column labels as shown below. We could fill in the table by
inserting formulas in all the cells, but a better way is to use an Excel data table as described in
the model for Chapter 4 (Bond Valuation). We used the data table procedure. Note that the
Row Input Cell is D9 and the Column Input Cell is D10, and we set Cell B32 equal to Cell
E11. Then, we selected (highlighted) the range B32:E38, then clicked Data, Table, and filled
in the menu items to complete the table.
Years (D10):
$ 1,610.51
0
1
2
3
4
5
Interest Rate (D9)
0%
5%
20%
$1,000.00 $1,000.00 $1,000.00
$1,000.00 $1,050.00 $1,200.00
$1,000.00 $1,102.50 $1,440.00
$1,000.00 $1,157.63 $1,728.00
$1,000.00 $1,215.51 $2,073.60
$1,000.00 $1,276.28 $2,488.32
To create the graph, first select the range C33:E38. Then click the chart wizard. Then follow
the menu. It is easy to make a chart, but a lot of detailed steps are involved to format it so that
it's "pretty." Pretty charts are generally not necessary to get the picture, though. Note that as the
last item in the chart menu you are asked if you want to put the chart on the worksheet or on a
separate tab. This is a matter of taste. We put the chart below on the spreadsheet so we could
see how changes in the data lead to changes in the graph.
To create the graph, first select the range C33:E38. Then click the chart wizard. Then follow
the menu. It is easy to make a chart, but a lot of detailed steps are involved to format it so that
it's "pretty." Pretty charts are generally not necessary to get the picture, though. Note that as the
last item in the chart menu you are asked if you want to put the chart on the worksheet or on a
separate tab. This is a matter of taste. We put the chart below on the spreadsheet so we could
see how changes in the data lead to changes in the graph.
Future Value
FV as Function of Time and Rate
$3,000
$2,500
0%
$2,000
$1,500
5%
$1,000
10%
$500
$0
0
1
2
3
4
5
Years
c. Find the PV of $1,000 due in 5 years if the discount rate is 10% per year. Again, work
the problem with...
