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Homework answers / question archive / 1)Leslie Mosallam, who recently sold her Porsche, placed  $10,200 in a savings account paying annual compound interest of 5 percent

1)Leslie Mosallam, who recently sold her Porsche, placed  $10,200 in a savings account paying annual compound interest of 5 percent

Finance

1)Leslie Mosallam, who recently sold her Porsche, placed  $10,200 in a savings account paying annual compound interest of 5 percent.

      1. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 2,  6,  and 16  year(s).
      2. Suppose Leslie moves her money into an account that pays 7 percent or one that pays 9 percent.  Rework part  (a ) using 7 percent and 9 percent.
      3. What conclusions can you draw about the relationship between interest rates, time, and future sums from the calculations you just did?
  1.  (Related to The Business of Life:  Saving for Your First House)  (Future value) You are hoping to buy a house in the future and recently received an inheritance of  $20,000.  You intend to use your inheritance as a down payment on your house.
      1. If you put your inheritance in an account that earns 9 percent interest compounded annually, how many years will it be before your inheritance grows to  $35,000 ?
      2. If you let your money grow for 10.5 years at 9 percent , how much will you have?
      3. How long will it take your money to grow to  $35,000 if you move it into an account that pays 4 percent compounded annually? How long will it take your money to grow to  $35,000 if you move it into an account that pays 13 percent?  d.  What does all this tell you about the relationship among interest rates, time, and future sums?

 

  1. (Related to Checkpoint 5.3)   (Compound interest with non-annual periods)  Calculate the amount of money that will be in each of the following accounts at the end of the given deposit period:

Amount            Annual  Compounding   Compounding  

Account Holder

Deposited

Interest Rate

Periods Per Year (M)

Periods (Years)

Theodore Logan III

$          900

12 %

12

10

Vernell Coles

94,000

10

4

3

Tina Elliot

7,000

12

6

6

Wayne Robinson

118,000

12

3

3

Eunice Chung

30,000

12

2

4

Kelly Cravens

16,000

10

1

4

  1. (Compound interest with non-annual periods )  You just received a bonus of  $4,000.
      1. Calculate the future value of  $4,000 , given that it will be held in the bank for 6 years and earn an annual interest rate of 7 percent.
      2. Recalculate part ( a ) using a compounding period that is (1) semiannual and (2) bimonthly.
      3. Recalculate parts  (a ) and  (b)  using an annual interest rate of 14 percent.
      4. Recalculate part ( a ) using a time horizon of 12 years at an annual interest rate of 7 percent.
      5. What conclusions can you draw when you compare the answers in parts  (c ) and  (d ) with the answers in parts  (a)  and
         
           

 (b ) ?

  1.  (Future value)  If you deposit  $2,400 today into an account earning an annual rate of return of 8  percent, what would your account be worth in 30 years (assuming no further deposits)?  In 35 years? 
      1. If you deposit  $2,400 today into an account earning an annual rate of return of 8  percent, what would your account be worth in 30  years?
         
           

 

      1. If you deposit  $2,400 today into an account earning an annual rate of return of 8  percent, what would your account be worth in 35 years?           
  1.  (Present value) Sarah Wiggum would like to make a single investment and have

$ 2.5 million at the time of her retirement in 25 years.  She has found a mutual fund that will earn 5 percent annually.  How much will Sarah have to invest today?  If Sarah earned an annual return of 17  percent, how soon could she then retire?  

 
   

 

 

      1. If Sarah can earn 5 percent annually for the next 25  years, the amount of money she will have to invest today is

 

  1.  ( Related to Checkpoint 5.5)  (Solving for n) How many years will it take for $ 510 to grow to $ 993.91 if it's invested at 9 percent compounded annually?
  2.  (Related to Checkpoint 5.4)  (Present value) Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of  $375,000 due in 29 years.  In other words, they will need  $375,000 in 29 years.  Toni Flanders, the company's CEO, is scrambling to discount the liability to the present to assist in valuing the firm's stock.  If the appropriate discount rate is 7 percent,     what is the present value of the liability?
  3.  (Related to Checkpoint 5.6) (Solving for i )  Lance Murdock purchased a wooden statue of a Conquistador for $7,600 to put in his home office 8 years ago.  Lance has recently married, and his home office is being converted into a sewing room.  His new wife, who has far better taste than Lance, thinks the Conquistador is hideous and must go immediately.  Lance decided to sell it on e-Bay and only received  $5,500 for it, and so he took a loss on the investment.  What was his rate of return, that is, the value of i ?
     
       
  4.  (Related to Checkpoint 5.4) (Present-value comparison) You are offered  $80,000 today or  $400,000 in 10 years.  Assuming that you can earn 11 percent on your money, which should you choose?

If

  1. Your grandmother asks for your help in choosing a certificate of deposit (CD) from a bank with a one-year maturity and a fixed interest rate.  The first certificate of deposit, CD #1, pays 5.95 percent APR compounded daily , while the second certificate of deposit, CD #2, pays 6.00 percent APR compounded weekly.  What is the effective annual rate (the EAR) of each CD, and which CD do you recommend to your grandmother?

 

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