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 to 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?