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Chapter 2

1. The quarterly interest rate is

( )

i 4 .06

=

= .015

4

4

and all time periods are measured in quarters. Using the end of the third year as the

comparison date

j=

**3000 (1 + j ) + X = 2000v 4 + 5000v 28
**

X = 2000 (.94218 ) + 5000 (.65910 ) − 3000 (1.19562 )

= $1593.00.

12

**2. The monthly interest rate is
**

(

)

i 12 .18

j=

=

= .015.

12 12

Using the end of the third month as the comparison date

**X = 1000 (1 + j ) − 200 (1 + j ) − 300 (1 + j )
**

3

2

**= 1000 (1.04568 ) − 200 (1.03023) − 300 (1.015 )
**

= $535.13.

3. We have

200v 5 + 500v10 = 400.94v 5

v10 = .40188v 5

v 5 = .40188 or

(1 + i )5 = 2.4883.

**Now using time t = 10 as the comparison date
**

P = 100 (1 + i ) + 120 (1 + i )

10

5

**= 100 ( 2.4883) + 120 ( 2.4883) = $917.76.
**

2

**4. The quarterly discount rate is 1/41 and the quarterly discount factor is
**

1 − 1/ 41 = 40 / 41 . The three deposits accumulate for 24, 16, and 8 quarters,

respectively. Thus,

−24

−16

−8

⎡

40 ⎞

3 ⎛ 40 ⎞

5 ⎛ 40 ⎞ ⎤

⎛

A ( 28 ) = 100 ⎢(1.025 ) ⎜ ⎟ + (1.025 ) ⎜ ⎟ + (1.025 ) ⎜ ⎟ ⎥ .

⎝ 41 ⎠

⎝ 41 ⎠

⎝ 41 ⎠ ⎦

⎣

However,

−1

⎛ 40 ⎞

⎜ ⎟ = 1.025

⎝ 41 ⎠

so that

25

19

13

A ( 28 ) = 100 ⎡⎣(1.025 ) + (1.025 ) + (1.025) ⎤⎦ = $483.11 .

14

4 years .04 ⎠ n [ ln1. .058269 − . Solving 15 .04 ) n n so that n ⎛ 1.039221 7. (a) At time t = 10 .04] = ln 2 and n= .94 ) 8.94 ) (. Simplifying. The given equation of value is 100 = 100v n + 100v 2 n which is a quadratic in v n .20 = 8669.25 6.94 ) ⎡⎣1 + (.94 )n = 4767. we have X (1 + 5i ) = 100 (1 + 15i ) + 100 (1 + 10i ) with i = . ln (.25 ) = 200 + 2500 (.94 ) = 5000 (.Solutions Manual Chapter 2 5. (b) At time t = 15 .The Theory of Interest .20 = .06 ⎞ ⎜ ⎟ =2 ⎝ 1. we have 4767.52 n ln (.05 X (1.94 ) = ln (.66 years. The given equation of value is 3000 + 2000v 2 = 5000v n + 5000v n +5 2 n 5 3000 + 2000 (1 − d ) = 5000 (1 − d ) ⎡⎣1 + (1 − d ) ⎤⎦ 2 n 5 and 3000 + 2000 (.06 .05 ) = 325 and 325 X= = $260 .52 (. we have X = 100 (1 + 10i ) + 100 (1 + 5i ) with i = .06 ) = 2000 (1.54988 ) = 9. 1. The given equation of value is 1000 (1.05 ) = $275.54988 ) n and n = ln (.94 ) ⎤⎦ since d = .06 − ln1.693147 = 36.54988 8669.05 = 200 + 1500 (.

25 years.81579 2 n 16 . i.618034 rejecting the negative root. We are given i = .33333) − ( 4 )(1) ( −. n = 114.e. Applying formula (2. we obtain ln 3 .14 = or a rule of 114.Solutions Manual Chapter 2 v2n + vn − 1 = 0 −1 ± 1 − ( 4 )(1)( −1) −1 + 5 = 2 2 = . = n 2n + 1 = n ( 12 ) ( n )( n + 1) 3 3 10.93744 ) v = = . i n≈ 11.93744 = 0.098612 .08 1. and n = ln1. n + 2n + " + n 2 n (1 + 2 + " + n ) 2 2 We now apply the formulas for the sum of the first n positive integers and their squares (see Appendix C) to obtain n 2 ( 16 ) ( n )( n + 1)( 2n + 1) 1 2n 2 + n ( )( ) .5 − 10 10v n + 30v 2 n = 67.08 )n = 1/ .076961 1.618034 = 6.08 9.61803 = 1.08 ) i .11)] = 67. We parallel the derivation of formula (2.5 (1.The Theory of Interest .11)] + 30 [1 + ( 5 )(.4) (1 + i )n = 3 or n = ln 3 ln (1 + i ) and approximating i by . Solving 2 −.08 ⋅ = ⋅ i ln (1.0915) + 30 (1.08 .2) n 2 + ( 2n ) + " + ( n 2 ) n 2 (1 + 22 + " + n 2 ) t = = .0915 ) = 67. Use time t = 10 as the comparison date A: 10 [1 + (10 )(.33333v n − .618034 ln1.33333 ± (.5 10 − n 10 − 2 n B: 10 (1.12331 which gives the quadratic v 2 n + . so that vn = (1.08.0915 ) = 28.

01) = 1.0746. − ln (1.01) = et 2 144t ln (1. 2 Simplifying. ( ) 14.The Theory of Interest . The given equation of value is 100 + 200v n + 300v 2 n = 600v10 .81579 ) = 2. The answer is i 2 = 2 j = 2 (. 13. We have 1000 (1 + j ) = 3000 30 and j = 31/ 30 − 1 = . Let j be the semiannual interest rate. Let t measure time in years.0915 ) 12.0373.43 years.33 years.Solutions Manual Chapter 2 and n= ln (. The given equation of value is 300 (1 + i ) + 200 (1 + i ) + 100 = 700. Then a A ( t ) = (1.01) = t 2 and t = 144 ln (1.0373) = .01) 12 t and t r / 6 dr 2 a B (t ) = e∫ 0 = et /12 . Substituting the given value of v n 17 .46%. Solving the quadratic i= = −8 ± 82 − ( 4 ) ( 3) ( −1) −8 ± 76 = ( 2 ) ( 3) 6 −8 + 2 19 19 − 4 = 6 3 rejecting the negative root. we get a quadratic 3 (1 + 2i + i 2 ) + 2 (1 + i ) − 6 = 0 3i 2 + 8i − 1 = 0. Equate the two expressions and solve for t (1. or 7.01)12t = et 2 /12 144 t or (1. 15.

0016 and i = . We have (1 + i )3 + (1 − i )3 = 2.The Theory of Interest .0096 2 + 6i 2 = 2.41212 ) − 1 = . . 19. The total amount of interest equals 1000i (1 + 2 + " + 10 ) = 55. or 4%. (a) Using Appendix A December 7 is Day 341 August 8 is Day 220.015. Thus. or 1.0096 i 2 = .Solutions Manual Chapter 2 100 + 200 (.51%. 50 18.75941) = 600v10 2 (1 + i )10 = 1.5) 360 (Y2 − Y1 ) + 30 ( M 2 − M 1 ) + ( D2 − D1 ) = 360 (1945 − 1941) + 30 ( 8 − 12 ) + ( 8 − 7 ) = 1321 days. (b) Applying formula (2.0351.41212 v10 = .0096 (1 + 3i + 3i 2 + i 3 ) + (1 − 3i + 3i 2 − i 3 ) = 2.000 17. 18 . or 3.000i = 1825 and i = 1825 = . We then have = 365 − 341 1941: 1942 : 24 365 1943: 365 1944: 1945: 366 220 (leap year) Total = 1340 days.1 16.5%. we have 1000 + 55.708155 or and i = (1. We will use i to represent both the interest rate and the discount rate. which are not equivalent. 55.75941) + 300 (. 000i.04. We have 10 a (10 ) = e ∫ 0 δ t dt 10 = e∫ 0 ktdt = e50 k = 2 so that 50k = ln 2 and k = ln 2 .0096 or 6i 2 = .

Usually.000 ) (. (a) The quarterly discount rate is (100 − 96 ) /100 = .5 = 1. Option B .09 ). n ≥ n* giving a larger answer which is more favorable to the lender.9% for three months: (1.02178. the Banker’s Rule always gives a larger answer since it has the smaller denominator and thus is more favorable to the lender. 22.33.04 ) = .03441. ⎝ 365 ⎠ (b) ⎛ 60 ⎞ I = (10. Clearly.25 = 100 4 ⎛ 100 ⎞ and i = ⎜ ⎟ − 1 = .07 ). ( ) d 4 = 4 (.Solutions Manual Chapter 2 20.00.0124.02178 19 .74%.03441 = 1. Thus.16.04. (b) With an effective rate of interest 96 (1 + i ) . ⎝ 360 ⎠ ⎛ n ⎞ 21.06 ) ⎜ ⎟ = $101.06 ) ⎜ ⎟ = $103.1774. (c) Invest for the month of February. (a) ⎛ 62 ⎞ I = (10. ⎝ 360 ⎠ (c) ⎛ 62 ⎞ I = (10.92.25 = 1.06 ) ⎜ ⎟ = $100.000 ) (. or 16%.7% for six months: (1. (a) Bankers Rule: I = Pr ⎜ ⎟ ⎝ 360 ⎠ ⎛ n ⎞ Exact simple interest: I = Pr ⎜ ⎟ ⎝ 365 ⎠ where n is the exact number of days in both. ⎝ 96 ⎠ 23. or 17.The Theory of Interest . The ratio is 1. 1.000 ) (. ⎛ n* ⎞ (b) Ordinary simple interest: I = Pr ⎜ ⎟ ⎝ 360 ⎠ where n* uses 30-day months. (a) Option A .

051 ⎞ 1 + i = ⎜1 + ⎟ 365 ⎠ ⎝ or APY = . so i = .0045 and 4 months at .1% compounded daily. The monthly interest rates are: .11374.24954. The APR = 5. This exercise is asking for the combination of CD durations that will maximize the accumulated value over six years.33701 or i = (1. or 7.02 ) = 1. The answer is y1 = 16 4 5000 (1.10682 = .003.25 = 1.Solutions Manual Chapter 2 (b) Option A . APR .07 )1.0259.018 = . All interest rates are convertible semiannually.07 )4 (1.07 ) (1.02 ) = 1.33701.0753.24954 or i = (1.003.051 Note that the term “APR” is used for convenience.9938. 12 12 The 24-month CD is redeemed four months early.5 = 1. 1 27.9% for 15 months: (1. so the yield rate is given by (1 + i )3 = 1. The accumulated value is 1 (c) (1.53%.07 )1.10682.17. (a) No bonus is paid. but in practice this term is typically used only with consumer loans.71%.7% for 18 months: (1.07 ) = (1. 26. 25. or 7.11374 24. so the yield rate is given by (1 + i )3 = 1.24954 ) 3 − 1 = .05232 APY .02 )(1. so the student will earn 16 months at . The ratio is 1.05232.0771.00%.054 . 3 (b) The accumulated value is (1. Option B . Various combinations are analyzed below: 20 . The APY is obtained from ⎛ .054 − .0045 ) (1.0045 and y2 = = . The ratio is 365 = 1.003) = $5437.07 )3 (1. or 7.0700.05232 = = 1.33701) 3 − 1 = .The Theory of Interest . 1.

5 . 12 All other accumulations involving shorter-term CD’s are obviously inferior.75 ⎞ i=⎜ ⎟ − 1 = . We then have (1 + i / 2 ) = 1. ⎝ .88853 and X = 100 (1 − .75R in six months.The Theory of Interest .98 10 10 / 28 (1 + i / 2 ) = (1. The maximum value is $1540. The retailer will be indifferent if these two present values are equal.98) = 1. Two: Pay (1 − .75 R (1 + i ) −.9 R (1.01X = .01X ) R immediately.04 ) (1.88853) = 11.15%. The retailer has two options: One: Pay . or 14.5 years: 1000 (1 + i / 2 ) 14 (1 + 2i / 4 ) 14 = 1980.08 ) − 16 1 6 = . 3-year/3-year: 1000 (1. Let the purchase price be R.34.035 ) = 1511. 10 At time 10. We have .75 . 29.9R in two months.34. We have (1 − .03) = 1540.01X ) R = . The customer will be indifferent if these two present values are equal.276 ) = $1276.08. 28.70R immediately.70 (1 + i ) = .80%. Let the retail price be R.276 28 and the answer is 1000 (1.5 and 2 ⎛ .70 R = . The customer has two options: One: Pay .9 (1.08 )− 1 − . At time 5 years 1000 (1 + i / 2 ) = X .Solutions Manual Chapter 2 8 4 4-year/2-year: 1000 (1.70 ⎠ 30.1480. Two: Pay . 21 .

215) = $17.75. 000 (1 + i )(1 + i − .30 )(1. We then have 10. 1000 1000 The early payment reduces the face amount by X.Solutions Manual Chapter 2 31. The answer then is 5 5 5 5 A (1.08 ) = $690. 000 (1.08 ) = 2000 20 20 10 10 2 A (1.125 + .05 ) = 12.06 ) + B (1.30.06 ) + ( 303. We are given A (1. Solving these simultaneous equations gives: A = 182.09 ) = 10.82 )(1. X= 22 .06 ) = B (1.95 ) − ( 4 )(1) ( −.96 and the face amount has been reduced to 1000 − 300 = $700. We then have X ⎡⎣1 − 12 (. 3 3 33. so that 288 = 300 .82 and B = 303.08. 093.08 ) which is two linear equations in two unknowns.06 ) + B (1.95i − .05i = 1.05 + i + i 2 − .209375 i 2 + 1.936.259375 = 0 2 −1.08 ) ⎤⎦ = 288.125 rejecting the negative root.30 .08 ) = (182. Solving the quadratic 1 + i − .95 ± (1. The annual discount rate is d= 1000 − 920 80 = = .The Theory of Interest . 32. We are given that 10. 000 (1 + .259375 ) i= 2 = .

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