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HW 1 Solution Fall 2014

This document contains 7 homework problems involving calculations of interest rates, present and future values of investments. 1) Calculates the future value of a $1000 investment earning 2% interest compounded quarterly over 4 years plus the future value of a $5000 investment earning the same rate over 12 years. 2) Finds the effective annual interest rate, present value factor, and payment amount for an annuity with a principal of $20k, 10-year term, and 4% interest compounded semiannually. 3) Solves for the size of the 6th payment in a growing annuity with the first payment of $2k that grows at 1.1% annually and earns 0.

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Nasr Cheaib
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63 views3 pages

HW 1 Solution Fall 2014

This document contains 7 homework problems involving calculations of interest rates, present and future values of investments. 1) Calculates the future value of a $1000 investment earning 2% interest compounded quarterly over 4 years plus the future value of a $5000 investment earning the same rate over 12 years. 2) Finds the effective annual interest rate, present value factor, and payment amount for an annuity with a principal of $20k, 10-year term, and 4% interest compounded semiannually. 3) Solves for the size of the 6th payment in a growing annuity with the first payment of $2k that grows at 1.1% annually and earns 0.

Uploaded by

Nasr Cheaib
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Homework Solution Set #1

1)

LIP = LCP = 3 months; i r / c .08 / 4 .02 2%


(1.02) 4 1
P 1000[ 4
] 5000(1.02) 12 3807.73 3942.47 7750.20
.02(1.02)
2)

Set LIP = LCP: i n (1 r / c) c / cn 1 where c n =2 (semiannual i n )

i n (1 .08 / 4) 1 .0404
4/2

Future Value of $20k at time 1: F 20000(1 .0404)1 $20,808

P[i(1 i) n ] 20,808[. 0404(1.0404)10 ]


A $2570.55
(1 i) n 1 (1.0404)10 1
3)

Future Value of $2k at t=2 is 2000(1.0067) 2 $2026.89

1 (1 g ) n (1 i) n 1 (1.1)12 (1.0067) 12
P F1 [ ] ==> 2026.89 F1 [ ]= F1 $99.7
(i g ) (.0067 .1)

Size of 6 th payment F6 F1 (1 g)5 99.70(1.1)5 $160.57

4)

Set LIP = LCP:


i n (1 r / c) c / cn 1 where c n =12 (monthly)

i n (1 .04 / 4) 1 .003322
4 / 12

A[(1 i n ) n 1] 100[(1.003322)10 1]
Future Value @ t=10 is F10
in .003322

F10 $1015.08

Future Value @ t=12 is 1015.08(1.003322) 2 $1021.84


5)
i eff (1 r / c) c 1 (1 .08 / 2) 2 1 .0816

Future Value of $5k @ t=1 is F1 5000(1.0816)1 5408

P[i(1 i) n ] 5408[. 0816(1.0816) 5 ]


$1360.19
(1 i) n 1 (1.0816) 5 1
6)a)

i n i eff (1 r / c) c 1 (1 .06 / 2) 2 1 .0609

Take $8k back 1 year: 8000(1.0609) 1 $7540.77

P[i(1 i) n ] 7540.77[. 0609(1.0609) 6 ]


A $1537.85
(1 i) n 1 (1.0609) 6 1

1537.85[(1.0609) 3 1]
b) Present Value (after third payment) 7540.77
.0609(1.0609) 3
$3436.9
Future Value @ t=4 3436.91(1.0609) 4 $4353.78
7)

Set LIP = LCP = 1 Month: i n (1 r / c) c / c n 1 (1 .06 / 4) 4 / 12 1


.00498
1.00498 1
Future Value @ t=60 100[ ] $6972.7
.00498

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