3-6
TIME VALUE OF MONEY
ANSWER KEY
1.
If you borrow $300,000 for two years at a 9% simple annual interest rate, how
much interest will you pay?
$54,000
I = P x R x T
I = $300,000 x 0.09 x 2
I = $54,000
2.
If you invest $270,000 for one-half year at a 9.5% simple annual interest rate, how
much will you earn on the investment?
$12,825
I = P x R x T
T = 1/2 or 0.5 or (180 days/360 days)
I = $270,000 x 0.095 x 0.5
I = $12,825
3.
If you borrow $500,000 for one year and have to pay back $540,000 at the end of
the year ($500,000 is the return of the principal; $40,000 is the interest), what is
the simple interest rate you are being charged for the loan?
8.0%
R = I / (P x T)
R = $40,000 / ($500,000 x 1)
R = 0.08 or 8.0%