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Assignment 2 FINAMAT Burns

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10 views7 pages

Assignment 2 FINAMAT Burns

Uploaded by

reinhardburns
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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PROBLEM 1: Simple Interest Calculation

A woman invests $1,000 at an interest rate of 5% per annum. How much Interest
will she earn after 3 years?

The formula for simple interest is:


I=Pxrxt

Where:
I = interest
P = principal amount
r = annual interest rate
t = time in years

Simple Interest Calculation

I = 1,000 x 0.05 x 3
I = 1,000 x 0.15
I = 150

Conclusion: The woman will earn $150 in interest on her investment of $1,000 after 3 years.
PROBLEM 2: Compound Interest Calculation

If $2,000 is invested in an account that offers an annual interest rate of 6%


compounded annually, how much will the investment be worth after 4 years?

The formula for compound interest is:


A = P (1+r) t

Where:
A = the amount of money accumulated after in years including interest
P = principal amount
r = annual interest rate
t = time in years

Compound Interest Calculation

A = 2,000 x (1+0.06)^4
1 + 0.06 = 1.06
(1.06)^4 = 1.2625
A = 2,000 x 1.2625 = 2,525

Conclusion: The investment will be worth approximately $2,525 after 4 years.


PROBLEM 3: Present Value Calculation
You want to have $15,000 in 5 years. If the interest rate is 8%
compounded annually, how much should you invest today?

The formula for present value is:


PV = FV / (1+r)1

Where:
PV = present value
FV = future value
r = annual interest rate
t = time in years

Present Value Calculation

PV = 15,000/ (1+0.08)^5
= 10,193.49

I should invest $10,193.49 today to have $15,000 in 5 years.


PROBLEM 4: Annuity Calculation
What is the future value of an ordinary annuity that pay $500 at the
end of each year 10 years at an interest rate of 5% compounded
annually?

The future value of an ordinary annuity is calculated using the


formula:
PV = P x (1 + r) 1 -1 / r

Where:
PV = present value
P = payment per period
r = annual interest rate
t = time in years

Annuity Calculation

FV = 500 x (1+0.05)^10 - 1/0.05


= 500 x 12.578 = 6,289

Conclusion: The future value of an ordinary annuity that pays $500 at the end of each year for 10 years at an interest rate of **5%** compounded annua
e of **5%** compounded annually is approximately $6,289.
PROBLEM 5: Continuous Compounding
If $1,000 is invested at an interest rate of 4% compounded continuously, how much will it
be worth after 3 years?

The formula for continuous compounding is:


A = Pe^rt

Where:
A = the amount of money accumulated after n years, including interest
P = principal amount
r = annual interest rate
t = time in years
e = Euler's number

Continuous Compounding

A = 1,000 x e^0.04x3
= 1,000 x 1.1275 = 1,127.50

Conclusion: After 3 years, an investment of $1,000 at an interest rate of 4% compounded continuously will be worth approximately $1,127.50.
y $1,127.50.

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