= Problems 129 Present worth, FUP/F.rcn) Nominal Interest Rate per Year, r ‘The annual interest rate without considering the affect of any compounding, Effective Interest Rate per Year, i; ‘The annual interest rate taking into account the effect of any compounding during the year. Effective interest rate per year (periodic compounding) n= (145) “1 = tar—1 Effective interest rate per year (continuous compounding): gee) PROBLEMS 4-4 Solve diagrams (a)~(c) for the unknowns R,S, and 4.2 For diagcams (a)-(@), compute the uaknowa vahies: , agguming a 10% interest rate B,C, Vi x, respectively, using the minimum number of compound interest factors, 100 100 10190 20) 200 200 200 ‘00 Loo 100 @ a © (Answers: R = $464.10; 8 = $218.90,7130 MORE INTEREST FORMULAS (Anowers: B = $228.13; C = $634; V = $51.05; x = $66.28) 4-3 For diagrams (2)-(i), compute the unknown valees CyA, PA, respectively. . . t | pe 4-5 Compute the value of P ia the diagram. 250 (Answers P too 120 4-6 Use a 10% interest rate to compute the value of X ir 0 1 a0 the disgraro, a cm fete TT] © @ (Answers: © = $109.45; A= $60.78) 4-4 For diagrams (@)-(d), compute the unknown values 4.5 {se a 1$6p interest rate Co compute the value of P it W, X, ¥, Z, respectively the diagram = S115, F = $276.37, o—8 ye«Problems 131 ‘- on ri] © | | 4G ta ii | me 4-9 Compute the value of # for the diagram, assuming a 10% interest rate 500 S00 4-14 Compute the value of D in the diagram 410 What is the value of n, for this diagram, based om a 31f% interest rate? 1000 4-17 Compute the value of J for the diagram, assuming a 10% interest rate. 390 100 160 02 gg oo rity sp yorod 200 412 Compute the valve of € for the diagram, assunsing a 10% interest rate ? oo - |i 23 | + M ,132___ MORE INTEREST FORMULAS - = as 4417 Find the value of P for the following cash fow 4-21 Derive am equation to find the end of year future sum diageam. F that is equivalent toa series of n beginning-of year 5000 payments B st interest rate #, Then use the equation to determine the future sum F equivalent to six B payments of $100 at 8% interest. (Answer: F = $792.28) 4.24 If $200 is deposited im a savings account st the 1250 beginning of each of 15 years, and the account draws 4-18 The following cash Row transactions are said 10 be ‘equivalent in terms of econonsic desirability at an in- terest cate of 12% compounded axnually. Deteranine the voknown value A. 750 600 450 300 AA AA 150 Ae bb 4 OP ad sO Cash Flow L Cash Flow 2 4-19 Upon the birth of his first child, Dick Jones decided 10 cstablish a savings account to partly pay forhis son's education. He plans to deposit $20 per month in the account, beginning when the boy is 13 months old ‘The savings and loan association bas a current inter= ‘est policy of 6% per annum, compounded monthly, paid quartedly. Assuming uo change in the interest rate, how much will be in the savings account when. Dick's son becomes 16 years old? Mary Lavor plans to save money at her bank for use in December. She will deposit $30 a month, begin- ning on March | and continuing through Noveoober 1 She will withdraw all the movey on December 1. If the bank pays 129% inlerest each month, how much money will she receive on December {? 420 423 a4 425 426 4a7 428 429 interest at 7% per year, how mue will be inthe ac count atthe end of 25 years? A company deposits $2000 in a bank at the end of every year for 1D years. ‘The compaay makes no de- posits during the subsequent 5 years I the bank pays 89% interest, how much would bein the account atend of 15 years? How smuch must be deposited now at 5.25% interest to produce $300 atthe end of every year for 10 years? A student wants to have $30,000 at graduation 4 years from now to buy anew ear. His grandfather gave him $10,000 as @ high school graduation present. How much must the student save each veer if he deposits the $10,000 today and can cam 12% on both the {$10,000 and his earings in a mutual fund his grand fatter recommends? ‘A city engineer knows that she will ned $25 mlion in 3 years to replace toll booths on atoll road in the city. Traffic op the road is estimated to be 20 million ‘vehicles per year. How much per vehicle should the toll be to caver the cost of the ‘oli booth replacement project? Interest is 10%. (Simplify your analysis by assuming thot the folk eceipks are received atthe end of each year ina lump sum.) Usiog linear interpolation, determine the value of (P/A, 619%, 10) from the compound interest tables. Compute this same value using the equation. Why do the values differ? ‘A man wants to help provide a college education for his young davghter. He can afford to invest $600¢yr for the next 4 years, beginning on the gis fourth birthday, He wishes to give his daughter $4000 on her 18, 19, 20%, and 21% birthdays, for @ cota fof $16,000. Assuming 5% interest, what uniform ‘annual investmeat will he have to make on the gies 8° through 17 biethdays? (Answer: $792.73) How many months will it take t pay off a $525 deb, with monthly payments of $15 at the end ofat 432 a3 434 435 cack month, ifthe interest rate is 18%, compounded montily? (4nswer: 50 months) For how many months, at an interest rete of 1% per ‘month, does money have to be invested before it will double in value? ‘A bank recently announced an "instant cash” plan for holders of is bank credit cards. A cardholder may receive cash from the bank up toa preset Umit (about $500), There is a special charge of 4% made at the time the “instantcash” is scat to the cardholders. The debt may be repaid in monthly installments. Each month the bank charges 1!4% on the unpaid balance. “The monthly payment, incloding interest, may be as little as $10, Thus, for $150 of “instant cash.” an ine tial charge of $6 is mage and.aded tothe balance due Assuime the cardholder makes a monthly payment of 510 (bis includes both pencipal and interest). How many months are required to eepay the debr? If your answer includes & Faction of @ month, round up to the next month, ‘A man borowed $500 from a bank on October 15% ie mustrepay the loan in 16 equal monthly payments, due on the 15% of each mnonth, beginning November 15. IF interes is computed at 1% per month, how nauch must he pay each month? Answer: $33.95) In Table 3-1 in the text, four plans were presented for the repayment of $5060 in 5 years with inter fest at 8%, Still another way to repay the $5000 would be to make four annual end-of-year payments of $1000 each, followed by « final payment at the end of the fifth year. How much would the final payment be? ‘An engincer borrowed $3000 from the bank, payable in six equal end-of-year payments at 8%, The bank agreed (0 reduce the interest on the loan if interest rates declined in the United States before the loan ‘was fully repaid. At the end of 3 years, at the time of the third payment, the bank agreed to reduce the inierest rate from 8% 10 7% on the remaining debt, ‘What was the amouot of the equal annual end-of-year payments for each of the first 3 years? What was the amouat of the equall annaal end-of-year payments for ceacls of the last 3 years? ‘4 $150 bicyele was purchased om December 1 with a $15 down payment. ‘The balance is to be paid at the rate of $10 at the end of each month, with the frst payment due on December 31. The last payment may be some amount less than $10. If interest on the un- 436, 437 438 439 4-40 _<_ Problems _ 133 paid balance is computed at 11/3% per month, how ‘many payments will there be, and what is the amount ‘ofthe final payment? (Answers: L6 payments; final Payment: $1.99) A company buys a machine for $12,000, which it agrees to pay forin five equal annual payments, begin- ‘sing one Year after the date of parchase, at an interest rate of 4% per annum. Immediately after the second payment, the terms of the agreement are changed to allow the balance duc to be paid off in a single pay- ‘ment the next year. What isthe final single payment? (Answer: $7778) Anengineering student bought acarata local used ear lot. Includiog (ax and insurance, the total price was $3000, He is to pay for the car in 12 equal monthly payments, beginning with the first payment immedi- ately (in other words, the frst payment was the down. payment). Nomina interest on the loan is 12%, com ‘pounded monthly. After six payments (the down pay- ‘meni plus five additional payments), he decides to sell the car. A buyer agrees to pay a cash ammount to ‘pay off the loan in full atthe time the next payment 35 due and also to pay the engineering student $1000. IF there are ao penalty charges for this carly payment of the loan, how much will the car cost the new buyer? A realtor sold a house on August 31, 1997, for $150,000 to a buyer in which a 20% down payment ‘was made, The buyer took a 15-year mortgage on the property with an effective interest rate of 8% per annum. The buyer intends to pay off the mortgage ‘owed in yearly payments starting on August 31, 1998, (@) How much ofthe mortgage wil still be owed after the payment due on August 31, 2004, has been made? (#) Solve the same problem by separating the interest ‘and the principal amounts, To provide for a college education for his daugh- (er, a man opened an eserow account in which equal deposits were made. The first deposit was made on January 1, 1981, and the last deposit was made on January 1, 1998, The yearly college expenses includ- ing tuition were estimated to be $8000, for cack of the 4 years. Assumting the interest rate to be 5.75%, ‘how much did the father have to deposit each yeac i the escrow account for the daughicr to draw $8000 per year for 4 years beginning January 1, 1998? Develop a complete amortization table for a loan ‘of $4500, to be paid back in 24 uniform monthly