Chapter 3: Interest and Equivalence

3-3
$2,000 + $2,000 (0.10 x 3) = $2,600
3-4
($5,350 - $5,000)

/(0.08 x $5,000) = $350/$400 = 0.875 years= 10.5 months

3-5
$200

4
Q
Q = $200 (P/F, 10%, 4)
= $200 (0.683)
= $136.60
3-6
P = $1,400 (P/A, 10%, 5) - $80 (P/G, 10%, 5)
= $1,400 (3.791) - $80 (6.862)
= $4,758.44
Using single payment factors:
P

= $1400 (P/F, 10%, 1) + $1,320 (P/F, 10%, 2) + $1,240 (P/F, 10%, 3) +

(P/F, 10%, 4) + $1,080 (P/F, 10%, 5)
= $1,272.74 + $1,090.85 + $931.61 + $792.28 + $670.57
= $4,758.05

3-7
P=$750, n =3 years, i =8%, F =?
F

= P (1+ i)n = $750 (1.08)3

= $945

Using interest tables:

= $750 (1.260)

$1,160

= $750 (F/P, 8%, 3)

= $945

= $750 (1.360)

3-8
F =$8,250, n = 4 semi-annual periods, i =4%, P =?
P = F (1+i)-n
= $7,052.10

= $8,250 (1.04)-4

= $8,250 (0.8548)

Using interest tables:

P = F (P/F, 4%, 4)
= $7,052.10

= $8,250 (0.8548)

3-9
Local Bank
F = $3,000 (F/P, 5%, 2) = $3,000 (1.102)
= $3,306
Out of Town Bank
F = $3,000 (F/P, 1.25%, 8) = $3,000 (1.104)
= $3,312
Additional Interest = $6

3-10
P = $1

n = unknown number of
semiannual periods

= P (1 + i)n

= 1 (1.02)n

= 1.02n

= log (2) / log (1.02)

= 35

i = 2%

F=2

Therefore, the money will double in 17.5 years.

3-13
Calculator Solution
1% per month F
12% per year

= $1,000 (1 + 0.01)12 = $1,126.83

F
= $1,000 (1 + 0.12)1
Savings in interest

= $1,120.00
= $6.83

Compound interest table solution

1% per month F
= $1,000 (1.127)
= $1,127.00
12% per year
F
= $1,000 (1.120)
= $1,120.00
Savings in interest
= $7.00
3-15
P = $600
F = $29,152,000
n = 92 years
F

= P (1 + i)n

$29,152,000/$600 = (1 + i)92
(1 + i)
i*

= ($48,587)(1/92)

= $45,587
= $48,587

= 0.124 = 12.4%

3-16
(a) Interest Rates
(i)
Interest rate for the past year = ($100 - $90)/$90
= $10/$90
= 0.111 or 11.1%
(ii)
Interest rate for the next year = ($110 - $100)/$100
= 0.10 or 10%
(b) $90 (F/P, i%, 2) = $110
(F/P, i%, 2) = $110/$90= 1.222
So,
(1 + i)2 = 1.222
i
= 1.1054 1 = 0.1054

= 10.54%

3-18
F

= P (1 + i)n

Solve for P:
P
= F/(1 + i)n
P
= F (1 + i)-n
P = $150,000 (1 + 0.10)-5 = $150,000 (0.6209)

3-20
Year
0
1
2
3
4

Cash Flow
-$2,000
-$4,000
-$3,625
-$3,250
-$2,875

= $93,135