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Homework answers / question archive / ST 2 Time Value Of Money It is now January 1,2012, and you will need $1,000 on January 1, 2016, in 4 years
ST 2 Time Value Of Money It is now January 1,2012, and you will need $1,000 on January 1, 2016, in 4 years. Your bank compounds interest at an 8% annual rate. e. Suppose you can deposit only $200 each January 1 from 2013 through 2016 (4 year). What interest rate, with annual compounding, must you earn to end up with $1,000 on January 1, 2016 ? f. Your father offers to gave you $400 on January 1, 2013. You will then make six additional equal payments each 6 months fromm July 2013 through January 2016. If your bank pays 8% compounded semiannually, how large must each payment be for you to end up with $1,000 on January 1, 2016 ? g. What is the EAR, or EFP %, earned on the bank account in Part f ?. what is the APR earned on the account ?.
Answer Part e with complete solution!
We will use the TVM function on a financial calculator to get the answer of question e by inserting the following parameters.
N(No. of periods) = 4 (given in question)
I/Y(Rate of interest) = ?
PV = 0 (No initial deposit is made)
PMT(Reccuring deposits made) = -200 (Given in question, The negative sign is for an outflow).
FV(Future Value) = 1000 (Amount needed on 1 January 2016).
And then we will press the CPT that is compute button and get the annually compounded interest rate which will be equals to 15.091108.
Although the method shown above is prefered
we can also use the calculation method written below.
Calculation method takes a hit and trial method to solve.
First we will assume the rate to be 13% and then solve for rate using the below equation.
Let the rate of interest required be 'r'.
-200*(1+0.13) + {-200*(1+0.13)^2} + {-200*(1+0.13)^3} + {-200*(1+00.13)^4}
-200*(1.13) + {-200*(1.13)^2} + {-200*(1.13)^3} + {-200*(1.13)^4}
= $969.9594
Now as the value we get using the rate of 13% is less than the amount of $1000 required at the emd of 4 years therefore now we will try the same calculation using a rate of 15%.
-200*(1+0.15) + {-200*(1+0.15)^2} + {-200*(1+0.15)^3} + {-200*(1+00.15)^4}
-200*(1.15) + {-200*(1.15)^2} + {-200*(1.15)^3} + {-200*(1.15)^4}
=$998.675
Now we get more close to the $1000 amount required at the end of 4 years.
Now we will try using a rate of 15.1%
-200*(1+0.151) + {-200*(1+0.151)^2} + {-200*(1+0.151)^3} + {-200*(1+00.151)^4}
-200*(1.151) + {-200*(1.151)^2} + {-200*(1.151)^3} + {-200*(1.151)^4}
=$1000.12939
Which is more than $1000 amount required therefore the rate would be somewhere between 15% to 15.1%.
Which is calculated to be 15.09%.
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