# YOUR SOLUTION + A COPY OF REVISION PAPER - 91889

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Suppose you deposits £ 10,000 in a bank account that pays 10 percent interest annually. How much money will be in his account after 5 years?

Solution

,           Present value (P) = £ 10,000,

Interest rate (k) = 10%

Number of years (n) = 5 years,

Future value (FV5) = ?

We have,

FV5 = PV × (1 + k)n     = £ 10,000 × (1.10)5

= £ 10,000 × 1.6105

= £ 16,105.10

What is the present value of a security that promises to pay you £ 5,000 in 20 years? Assume that you can earn 7 percent if you were to invest in other securities of equal risk?

Solution

Here,   Future value (FV) = £ 5,000

Number of years (n) = 20 years

Interest rate (k) = 7%

Present value (PV) = ?

We have,

PV  = = 5000/ (1.07)20

=5000/3.8697 = £ 1,292.09

Your parents are planning to retire in 18 years. They currently have £ 250,000, and they would like to have £ 1,000,000 when they retire. What annual rate of interest would they have to earn on their £ 250,000 in order to reach their goal, assuming they save no more money?

Solution

Here,   Future value (FV) = £ 1,000,000

Present value (PV) = £ 250,000

Time period (n) = 18 years

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