Time Value of Money and Bonds Valuation As Laura’s new year resolution, she want

Question

Time Value of Money and Bonds Valuation

As Laura’s new year resolution, she wants to begin saving money for her retirement. You are hired as her financial advisor. Following your suggestion, today Laura will deposit $100,000, which she inherited from her parents, into a 5-year savings account at Citi bank, which pays 3.25% interest annually.

8. Assume Laura also told you her expected residual savings from 2019 to 2023 will be: $15,000, $20,000, $25,000, $30,000, $35,000. She wants to know the present values of these savings at an 8% discount rate. Calculate PVs of the streams.

Explanation / Answer

Case 1:

How much amount will be in her Citi Bank accounts after 5 years.

Future Value = Present Value x (1+Rate)^ Years

FV = 100000 x (1+3.25%)^5 = $1,17,341.14

Future value in here account = $1,17,341.14

Case 2:

Present value = Sum of (Present value of future cash flows or Discounted cash flows)

Present Value = 15000/(1+8%)^1 + 20000/(1+8%)^2 + 25000/(1+8%)^3 + 30000/(1+8%)^4 + 35000/(1+8%)^5

Present value = $96,752.78

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