Name:_________________________________ 5.

1 Problem Set 115

Do the following simple interest problems.

1) If an amount of $2,000 is borrowed at a simple 2) You borrow $4,500 for six months at a simple
interest rate of 10% for 3 years, how much is the interest rate of 8%. How much is the interest?
interest?

3) John borrows $2400 for 3 years at 9% simple 4) Jessica takes a loan of $800 for 4 months at 12%
interest. How much will he owe at the end of 3 simple interest. How much does she owe at the end
years? of the 4-month period?

5) If an amount of $2,160, which includes a 10% 6) Jamie just paid off a loan of $2,544, the principal
simple interest for 2 years, is paid back, how much and simple interest. If he took out the loan six
was borrowed 2 years earlier? months ago at 12% simple interest, what was the
amount borrowed?

7) Shanti charged $800 on her charge card and did not 8) A credit card company charges 18% interest on the
make a payment for six months. If there is a unpaid balance. If you owed $2000 three months
monthly charge of 1.5%, how much does she owe? ago and have been delinquent since, how much do
you owe?
9) An amount of $2000 is borrowed for 3 years. At the 10) Nancy borrowed $1,800 and paid back $1,920, four
end of the three years, $2660 is paid back. What months later. What was the simple interest rate?
was the simple interest rate?

11) Jose agrees to pay $2,000 in one year at an interest 12) Tasha signs a note for a discounted loan agreeing to
rate of 12%. The bank subtracts the discount of pay $1200 in 8 months at an 18% discount rate.
12% of $2,000, and gives the rest to Jose. Find the Determine the amount of the discount and the
amount of the discount and the proceeds to Jose. proceeds to her.

13) An amount of $8,000 is borrowed at a discount rate 14) An amount of $4,000 is borrowed at a discount rate
of 12%, find the proceeds if the length of the loan is of 10%, find the proceeds if the length of the loan is
7 months. 180 days.

15) Derek needs $2400 new equipment for his shop. He 16) Mary owes June $750, and wants to pay her off.
can borrow this money at a discount rate of 14% for She decides to borrow the amount from her bank at
a year. Find the amount of the loan he should ask a discount rate of 16%. If she borrows the money for
for so that his proceeds are $2400. 10 months, find the amount of the loan she should
ask for so that her proceeds are $750?
COMPOUND INTEREST
Do the following compound interest problems involving a lump-sum amount.

1) If $8,000 is invested at 9.2% compounded monthly, 2) How much should be invested at 10.3% for it to
what will the final amount be in 4 years? amount to $10,000 in 6 years?

3) Lydia's aunt Rose left her $5,000. Lydia spent 4) Thuy needs $1,850 in eight months for her college
$1,000 on her wardrobe and deposited the rest in an tuition. How much money should she deposit lump
account that pays 6.9% compounded daily. How sum in an account paying 8.2% compounded
much money will she have in 5 years? monthly to achieve that goal?

5) Bank A pays 5% compounded daily, while Bank B 6) EZ Photo Company needs five copying machines in
pays 5.12% compounded monthly. Which bank 2 1/2 years for a total cost of $15,000. How much
pays more? Explain. money should be deposited now to pay for these
machines, if the interest rate is 8% compounded
semiannually?

7) Jon's grandfather was planning to give him $12,000 8) What will be the price of a $20,000 car in 5 years if
in 10 years. Jon has convinced his grandfather to the inflation rate is 6%?
pay him $6,000 now, instead. If Jon invests this
$6,000 at 7.5% compounded continuously, how
much money will he have in 10 years?
9) At an interest rate of 8% compounded continuously, 10) If an investment earns 10% compounded
how many years will it take to double your money? continuously, in how many years will it triple?
Hint: You may do this on your calculator by trial Hint: You may do this on your calculator by trial
and error. and error.

11) The City Library has ordered a new computer 12) Mr. and Mrs. Tran are expecting a baby girl in a few
system costing $158,000. The system will be days. They want to put away money for her college
delivered in 6 months, and the full amount will be education now. How much money should they
due 30 days after delivery. How much should be deposit in an account paying 10.2% so they will
deposited today into an account paying 7.5% have $100,000 in 18 years to pay for their daughter's
compounded monthly to have $158,000 in 7 educational expenses?
months?

13) Find the effective interest rate for an account paying 14) If a bank pays 5.75% compounded monthly, what is
7.2% compounded quarterly. the effective interest rate?

15) Population of California in the year 1995 was 32 16) According to the Law of 70, if an amount grows at
million. If the population grows at a rate of 2%, an annual rate of 1%, then it doubles every seventy
what will the population be in 2025? years. Suppose a bank pays 5% interest, how long
will it take for you to double your money? How
about at 15%?
ANNUITIES AND SINKING FUNDS
Each of the following problems involve an annuity - a sequence of payments.

1) Find the future value of an annuity of $200 per 2) How much money should be deposited at the end of
month for 5 years at 6% compounded monthly. each month in an account paying 7.5% for it to
amount to $10,000 in 5 years?

3) At the end of each month Rita deposits $300 in an 4) Mr. Chang wants to retire in 10 years and can save
account that pays 5%. What will the final amount $650 every three months. If the interest rate is
be in 4 years? 7.8%, how much will he have at the end of 5 years?

5) A firm needs to replace most of its machinery in five 6) Mrs. Brown needs $5,000 in three years. If the
years at a cost of $500,000. The company wishes to interest rate is 9%, how much should she save at the
create a sinking fund to have this money available in end of each month to have that amount in three
five years. How much should the quarterly deposits years?
be if the fund earns 8%?
7) A company has a $120,000 note due in 4 years. 8) You are now 20 years of age and decide to save
How much should be deposited at the end of each $100 at the end of each month until you are 65. If
quarter in a sinking fund to payoff the note in four the interest rate is 9.2%, how much money will you
years if the interest rate is 8%? have when you are 65?

9) Is it better to receive $400 at the beginning of each 10) In order to save money for a new computer Jill
month for six years, or a lump sum of $25,000 today decided to save $125 at the beginning of each month
if the interest rate is 7%? Explain. for the next 8 months. If the interest rate is 7%, how
much money will she have at the end of 8 months?

11) Mrs. Gill puts $2200 at the end of each year in her 12) If the inflation rate stays at 6% per year for the next
IRA account that earns 9% per year. How much five years, how much will the price be of a $15,000
total money will she have in this account after 20 car in five years? How much must you save at the
years? end of each month at an interest rate of 7.3% to buy
that car in 5 years?
PRESENT VALUE OF AN ANNUITY AND INSTALLMENT PAYMENT
For the following problems, show all work.

1) Shawn has won a lottery paying him $10,000 per 2) Sonya bought a car for $15,000. Find the monthly
month for the next 20 years. He'd rather have the payment if the loan is to be amortized over 5 years
whole amount in one lump sum today. If the current at a rate of 10.1%.
interest rate is 8.2%, how much money can he hope
to get?

3) You determine that you can afford $250 per month 4) Compute the monthly payment for a house loan of
for a car. What is the maximum amount you can $200,000 to be financed over 30 years at an interest
afford to pay for a car if the interest rate is 9% and rate of 10%.
you want to repay the loan in 5 years?

5) If the $200,000 loan in the previous problem is 6) Friendly Auto offers Jennifer a car for $2000 down
financed over 15 years rather than 30 years at 10%, and $300 per month for 5 years. Jason wants to buy
what will the monthly payment be? the same car but wants to pay cash. How much
must Jason pay if the interest rate is 9.4%?
7) The Gomez family bought a house for $175,000. 8) Mr. and Mrs. Wong purchased their new house for
They paid 20% down and amortized the rest at $350,000. They made a down payment of 15%, and
11.2% over a 30-year period. Find their monthly amortized the rest over 30 years. If the interest rate
payment. is 9%, find their monthly payment.

9) A firm needs a piece of machinery that has a useful 10) Jackie wants to buy a $19,000 car, but she can
life of 5 years. It has an option of leasing it for afford to pay only $300 per month for 5 years. If
$10,000 a year, or buying it for $40,000 cash. If the the interest rate is 6%, how much does she need to
interest rate is 10%, which choice is better? put down?

11) Vijay's tuition at Stanford for the next year is 12) Glen borrowed $10,000 for his college education at
$32,000. His parents have decided to pay the 8% compounded quarterly. Three years later, after
tuition by making nine monthly payments. If the graduating and finding a job, he decided to start
interest rate is 9%, what is the monthly payment? paying off his loan. If the loan is amortized over
five years at 9%, find his monthly payment for the
next five years.
MISCELLANEOUS APPLICATION PROBLEMS
For problems 1 - 4, assume a $200,000 house loan is amortized over 30 years at an interest rate of 10.4%.

1) Find the monthly payment. 2) Find the balance owed after 20 years.

3) Find the balance of the loan after 100 payments. 4) Find the monthly payment if the original loan were
amortized over 15 years.

5) Mr. Patel wants to pay off his car loan. The 6) An amount of $2000 is borrowed for a year at a rate
monthly payment for his car is $365, and he has 16 of 18%. Make an amortization schedule showing
payments left. If the loan was financed at 9%, how the monthly payment, the monthly interest on the
much does he owe? outstanding balance, the portion of the payment
going toward reducing the debt, and the balance.
7) Fourteen months after Dan bought his new car he 8) You have a choice of either receiving $5,000 at the
lost his job. His car was repossessed by his lender end of each year for the next 5 years or receiving
after he had made only 14 monthly payments of $3000 per year for the next 10 years. If the current
$376 each. If the loan was financed over a 4-year interest rate is 9%, which is better?
period at an interest rate of 10.3%, how much did
the car cost the lender? In other words, how much
did Dan still owe on the car?

9) Mr. Smith is planning to retire in 25 years and 10) Assume Mr. Smith has reached retirement and has
would like to have $250,000 then. What monthly $250,000 in an account which is earning 6.5%. He
payment made at the end of each month to an would now like to make equal monthly withdrawals
account that pays 6.5% will achieve his objective? for the next 15 years to completely deplete this
account. Find the withdrawal payment.

11) A ten-year $1,000 bond pays $35 every six months. 12) Find the fair market value of the ten-year $1,000
If the current interest rate is 8.2%, find the fair bond that pays $35 every six months, if the current
market value of the bond. interest rate has dropped to 6%.
Hint: You must do the following. Hint: Again, you must do the following.
a) Find the present value of $1000. a) Find the present value of $1000.

b) Find the present value of the $35 payments. b) Find the present value of the $35 payments.

c) The fair market value of the bond = a + b c) The fair market value of the bond = a + b
CLASSIFICATION OF FINANCE PROBLEMS
Let the letters A, B, C, D, E and F be represented as follows:
A = FV of a lump-sum C = FV of an annuity E = Installment payment
B = PV of a lump-sum D = Sinking fund payment F = PV of an annuity
For the following problems, Classify, by writing the appropriate letter in the box, and writean equation for solution.
1) What monthly deposits made to an account paying 9% will grow to $10,000 in 4 years?

2) An amount of $4000 is invested at 6% compounded daily. What will the final amount be in 5 years?

3) David has won a lottery paying him $10,000 per month for the next 20 years. He'd rather have the whole
amount in one lump sum now. If the current interest rate is 7%, how much money can he hope to get?

4) Each month Linda deposits $250 in an account that pays 9%. How much money will she have in 4 years?

5) Find the monthly payment for a $15,000 car if the loan is amortized over 4 years at a rate of 10%.

6) What lump-sum deposited in an account paying 7% compounded daily will grow to $10,000 in 5 years?

7) What amount of quarterly payments will amount to $250,000 in 5 years at a rate of 8%?

8) The Chang family bought their house 25 years ago. They had their loan financed for 30 years at an interest
rate of 11% resulting in a payment of $1350 a month. Find the balance of the loan.

9-10)A 10-year $1000 bond pays $35 every six months. If the current interest rate is 8%, in order to find the fair
market value of the bond, we need to find the following.
a) The present value of $1000. b) The present value of the $35 per six month payments.

11) What lump-sum deposit made today is equal to 33 monthly deposits of $500 if the interest rate is 8%?
12) What should be the size of the monthly deposits made to an account paying 10% so that their accumulated
value will be $10,000 in six years?

13) A department store charges a finance charge of 1.5% per month on the outstanding balance. If Ned charged
$400 three months ago and has not paid his bill, how much does he owe?

14) What will the value of $300 monthly deposits be in 10 years if the account pays 12% compounded monthly?

15) What lump-sum deposited at 6% compounded daily will grow to $2000 in three years?

16) A company buys an apartment complex for $5,000,000 and amortizes the loan over 10 years. What is the
yearly payment if the interest rate is 14%?

17) In 1970, a house in Reno cost $23,000. If the inflation rate is 8%, what is the price of that house in 1997?

18) You determine that you can afford to pay $400 per month for a car. What is the maximum price you can pay
for a car if the interest rate is 11% and you want to repay the loan in 4 years?

19) A business needs $350,000 in 5 years. How much lump-sum should be put aside in an account that pays 9% so
that five years from now the company will have $350,000?

20) A person wishes to have $500,000 in a pension fund 20 years from now. How much should he deposit each
month in an account paying 9% compounded monthly?
CHAPTER REVIEW

1) Manuel borrows $800 for 6 months at 18% simple interest. How much does he owe at the end of 6 months?

2) The population of California is 32 million and expects to grow at a rate of 2.3% per year for the next 10 years.
What will the population of California be in 10 years?

3) The Gill family is buying a $250,000 house with a 10% down payment. If the loan is financed over a 30 year
period at an interest rate of 9.8%, what is the monthly payment?

4) Find the monthly payment for the house in the above problem if the loan was amortized over 15 years.

5) You look at your budget and decide that you can afford $250 per month for a car. What is the maximum
amount you can afford to pay for the car if the interest rate is 8.6% and you want to finance the loan over 5
years?

6) Mr. Nakahama bought his house in 1980. He had his loan financed for 30 years at an interest rate of 11.2%
resulting in a monthly payment of $1500. In 1997, 17 years later, he paid off the balance of the loan. How
much did he pay?

7) Lisa buys a car for $16,500, and receives $2400 for her old car as a trade-in value. Find the monthly payment
for the balance if the loan is amortized over 5 years at 8.5%.

8) A car is sold for $3000 cash down and $400 per month for the next 4 years. Find the cash value of the car
today if the money is worth 8.3% compounded monthly.

9) An amount of $2300 is borrowed for 7 months at a simple interest rate of 16%. Find the discount and the
proceeds.

10) Marcus has won a lottery paying him $5000 per month for the next 25 years. He'd rather have the whole
amount in one lump sum today. If the current interest rate is 7.3%, how much money can he hope to get?

11) In 1970, an average house in Cupertino cost $41,000. If the average inflation rate for the past years has been
about 9.3%, what is the price of that house in 1997?

12) Find the 'fair market' value of a ten-year $1000 bond which pays $30 every six months if the current interest
rate is 7%. What if the current interest rate is 5%?

13) A Visa credit card company has a finance charge of 1.5% per month ( or 18% per year) on the outstanding
balance. John owed $3200 and has been delinquent for 5 months. How much total does he owe, now?

14) You want to purchase a home for $200,000 with a 30-year mortgage at 9.24% interest. Find a) the monthly
payment and b) the balance owed after 20 years.

15) When Jose bought his car, he amortized his loan over 6 years at a rate of 9.2%, and his monthly payment came
out to be $350 per month. He has been making these payments for the past 40 months and now wants to pay
off the remaining balance. How much does he owe?

16) A lottery pays $10,000 per month for the next 20 years. If the interest rate is 7.8%, find both its present and
future values.

17) A corporation estimates it will need $300,000 in 8 years to replace its existing machinery. How much should it
deposit each quarter in a sinking fund earning 8.4% compounded quarterly to meet this obligation?

18) Our national debt in 1992 was about $4 trillion. If the annual interest rate was 7% then, what was the daily
interest on the national debt?

19) A business must raise $400,000 in 10 years. What should be the size of the owners' monthly payments to a
sinking fund paying 6.5% compounded monthly?
20) The population of a city of 80,000 is growing at a rate of 3.2% per year. What will the population be at the end
of 10 years?

21) A sum of $5000 is deposited in a bank today. What will the final amount be in 20 months if the bank pays 9%
and the interest is compounded monthly?

22) A computer is sold for $500 cash and $50 per month for the next 3 years. Find the cash value of the computer
today if the money is worth 6.2% compounded monthly.

23) The United States paid about 4 cents an acre for the Louisiana Purchase in 1803. Suppose the value of this
property grew at a rate of 5.5% annually. What would an acre be worth in the year 2000?

24) What amount should be invested per month at 9.1% compounded monthly so that it will become $5000 in 17
months?

25) A machine costs $8000 and has a life of 5 years. It can be leased for $160 per month for 5 years with a cash
down payment of $750. If the current interest rate is 8.3%, is it cheaper to lease or to buy?

26) If inflation holds at 5.2% per year for 5 years, what will be the cost in 5 years of a car that costs $16,000
today? How much will you need to deposit each quarter in a sinking fund earning 8.7% per year to purchase
the new car in 5 years?

27) City Bank pays an interest rate of 6%, while Western Bank pays 5.8% compounded continuously. Which one
is a better deal?

28) Ali has inherited $20,000 and is planning to invest this amount at 7.9% interest. At the same time he wishes to
make equal monthly withdrawals to use up the entire sum in 5 years. How much can he withdraw each month?

29) Jason has a choice of receiving $300 per month for the next 5 years or $500 per month for the next 3 years.
Which one is worth more if the current interest rate is 7.7%?

30) If a bank pays 6.8% compounded continuously, how long will it take to double your money?

31) Janus Mutual Funds claims a growth rate of 17% per year. If $500 per month is invested, what will the final
amount be in 15 years?

32) Mr. Vasquez has been given two choices for his compensation. He can have $20,000 cash plus $500 per
month for 10 years, or he can receive $12,000 cash plus $1000 per month for 5 years. If the interest rate is 8%,
which is the better offer?

33) How much should Mr. Shackley deposit in a trust account so that his daughter can withdraw $400 per month
for 4 years if the interest rate is 8%?

34) Mr. Albers borrowed $425,000 from the bank for his new house at an interest rate of 9%. He will make equal
monthly payments for the next 30 years. How much money will he end up paying the bank over the life of the
loan, and how much is the interest?

35) Mr. Tong puts away $500 per month for 10 years in an account that earns 9.3%. After 10 years, he decides to
withdraw $1,000 per month. If the interest rate stays the same, how long will it take Mr. Tong to deplete the
account?

36) An amount of $5000 is borrowed for 15 months at an interest rate of 9%. Determine the monthly payment and
construct an amortization schedule showing the monthly payment, the monthly interest on the outstanding
balance, the amount of payment contributing towards debt, and the outstanding debt.