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FIN521 Problems Week2-1

1. The CD will pay 6.5% interest annually on a $2,000 investment. After 10 years the amount will be $3,754.27. 2. A 10-year Treasury bond purchased for $3,000 paying $5,000 at maturity will earn an interest rate of 5.24%. 3. It will take 7.838 years for a $5,000 investment earning 8% annually to grow to $9,140.20.

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303 views18 pages

FIN521 Problems Week2-1

1. The CD will pay 6.5% interest annually on a $2,000 investment. After 10 years the amount will be $3,754.27. 2. A 10-year Treasury bond purchased for $3,000 paying $5,000 at maturity will earn an interest rate of 5.24%. 3. It will take 7.838 years for a $5,000 investment earning 8% annually to grow to $9,140.20.

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1 Your bank offers a a 10-year

certificate of deposit (CD) that


pays 6.5% interest, compounded
annually. If you invest $2,000 in
the CD, how much will you have
P 2000 C 3754.27493054 when it matures?
i 6.50%
N 10 -3754.2749305
You have purchased a U.S. Treasury bond for $3,000. No payments will
be made until the bond matures 10 years from now, at which time it will
be redeemed for $5,000. What interest rate will you earn on this bond?
P 3000
n 10
C 5000
I?
C=P+(1+i)^n
I=(C/P)^(1/N)-1
5.24%
4/13/2020 4/13/2030
4/13/2020

5.24%
3 Your investment account pays 8.0%, compounded annually.
If you invest $5,000 today, how many years will it take for your
investment to grow to $9,140.20? A=P(1+r/100)^n

7.838308 7.838308132599
Future Value (A) 9140.2
Present value( P) 5000
Rate of interest (r) 8% 0.603228
Time Period (n) ?
4 A new investment opportunity for you is an annuity that pays
$550 at the beginning of each year for 3 years. You could earn
5.5% on your money in other investments with equal risk. What
is the most you should pay for the annuity?
n 3
i 5.50%
pmt 550

-1,565.48 KM
5

Years: 0 1 2 3 4
| | | | |
CFs: $ - $ 100.00 $ 300.00 $ 300.00 $ -50.00

$ 481.90
What is the present value of the following cash flow
stream at a rate of 6.25%?
10%

0 $ - 1
1 $ 100.00 0.909091
2 $ 300.00 0.826446
3 $ 300.00 0.751315
4 $ -50.00 0.683013
$ -
$ 90.91
$ 247.93
$ 225.39
$ -34.15
$ 530.09
What’s the future value of $1,500 after 5 years if the
appropriate interest rate is 6%, compounded
semiannually?
pv 1500
nper 10
i 6%

-2,016 KM
Comound period 2
Number of years 5

103% 1.343916379344 2,016


7 Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%,
compounded monthly. The loan (principal plus interest) must be repaid at
the end of the year. Woodburn Bank also offers to lend you the $50,000,
but it will charge an annual rate of 7.0%, with no interest due until the end
of the year. How much higher or lower is the effective annual rate charged
by Woodburn versus the rate charged by Southwestern?
SWB pv 50000 WB
i 6.50%
n 12

0.00541667 1.00541667 1.06697185


6.70%
6.70% 7%

0.30%
8 Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5
equal installments at the end of each of the next 5 years. How much
would you still owe at the end of the first year, after you have made the
first payment?
PMT 15000
I 8.50%
n 5

Annual Paymet 3806.486


Interest for 1st ye 1275
Principal paid 2531.486
Principal due 12468.51

Annual Paymet 3,806.49 KM


Interest for 1st ye 1275
Principal paid 2,531.49 KM
Principal due 12,468.51 KM
1275 6375
9 Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%,
simple interest, with interest paid quarterly. An offer to lend you the
$50,000 also comes from Community Bank, but it will charge 6.0%, simple
interest, with interest paid at the end of the year. What's the difference in
the effective annual rates charged by the two banks?

Partnes Bank
PV 50000 PV 50000
I 5% 5% I 5% 6%
M 4 M 1

5.095% CB 6.000%

0.91%

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