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1) What single payment today would replace a payment of $2,600 in 1 years and a payment of $5,700 in 5 years if the interest rate is 6
1) What single payment today would replace a payment of $2,600 in 1 years and a payment of $5,700 in 5 years if the interest rate is 6.85% compounded quarterly?
- If money earns 4.32% compounded quarterly, what single payment in two years would be equivalent to a payment of $2,170 due three years ago, but not paid, and $650 today?
- How much did Speedy Movers borrow for a debt that accumulated to $57,908.29 in three years? The interest rate was 3.93% compounded monthly.
- Kimberly loaned $69,000 to a small business at 3.67% compounded quarterly for 1 year and 6 months. How much would the business have to repay her at the end of the period?
- Payments of $1,250 in 1 year and another $2,900 in 4 years to settle a loan are to be rescheduled with a payment of $1,050 in 18 months and the balance in 30 months. Calculate the payment required in 30 months for the rescheduled option to settle the loan if money earns 4.5% compounded semi-annually during the above periods.
- Alexander would like to accumulate $415,000 for her retirement in 13 years. If she is promised a rate of 4.77% compounded monthly by her local bank, how much should she invest today?
Expert Solution
1) Computation of Single Payment Today:
A=P(1+r/400)^4n
where
A=future value
P=present value
r=rate of interest
n=time period.
2600=P1(1+0.0685/4)^(4*1)
P1=2600/(1+0.0685/4)^(4*1)
=(2600/1.07028)
=$2429.27
Also:
5700=P2(1+0.0685/4)^(4*5)
5700/(1+0.0685/4)^(4*5)=P2
P2=4,058.71
Hence single payment today =$2429.27+$4058.71 = $6,487.98
2) Computation of Single payment 3 years from now:
Interest rate r = 4.32% compounded quarterly.
$2,170 was due 3 years ago and $650 is due today.
So, value of these dues after 3 years can be calculated using compounding formula
Single equivalent payment = 650*(1+0.0432/4)^(4*3) + 2,170*(1+0.0432/4)^(4*6) = $3,547.61
So, Single payment 3 years from now is $3,547.61
3) Computation of Borrowing Amount or Present Value:
Present value = Future Value / (1+r)^n
r = 0.0393 / 12 = 0.3275%
n = 3 years * 12 months = 36 months
Present Value = 57908.29 / (1+0.3275%)^36 = 51,477.93
4) Computation of Amount at the End of the Period:
Amount = Principal*(1+Rate)^Time
Here,
Principal = $69,000
Rate = 3.67%/4
Time = 1 Year 6 Months or 4 quarters + 2 quarters = 6 quarters
Amount = $69,000*(1+(3.67%/4))^6 = $72,886.65
5) Computation of Payment required in 30 Months:
A payment of $1250 in 1 year and another $2,900 in 4 years to settle a loan are to be rescheduled with a payment of $1,050 in 18 months and the balance in 30 months
Interest rate = 4.5% compounded semiannually
So, PV of payment of $1250 in 1 year and another $2,000 in 4 years using
PV = FV/(1+r/n)^(n*t)
PV = 1250/(1+0.045/2)^(12*1) + 2900/(1+0.045/2)^(2*4) = $3,384.21
Comparing this with PV of rescheduled payments is
3,622.71 = 1050/(1+0.045/12)^18 + A/(1+0.045/12)^30
3,622.71 - 981.59 = A/(1+0.045/12)^30
2,641.13 * (1+0.045/12)^30 = A
A = $2954.99
So, Payment required in 30 months is $2688.14
6) Computation of Amount of Investment or Principal:
Amount = Principal*(1+Rate)^Time
$415,000 = Principal*(1+4.77%/12)^(12*13)
$415,000/1.85683 = Principal
Principal = $223,499.17
So, She need to invest $223,499.17 today.
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