Compounded Interest

Question 1:

A $3000 loan is to be repaid with three equal payments made 3,6 and 9 months, respectively
from the date of the loan. If interest is compounded monthly what amount of each payment?
Ans: x=$1030.30
Question 2:
Jack has just been notified that the combined principal and interest on an amount he borrowed
20 months ago at 9.4%compounded monthly is now 3797.78. how much of this amount is
principal and how much is interest?
Ans: P=$3249.04 I=$548.74

Annuities
Question 1:
John has saved $35,000 for a down payment on a home and plans to save another $6,500 at
the end of each year for the next six years. He expects to earn 3.00% compounded annually on
his savings. How much will he have in six year's time?
Ans=$46,223.847
Questions 2:
An investment pays $50 at the end of every six months for 17 years, the investment will pay an
additional $1,000 along with the last regular $50 payment. What is the fair market value of the
investment if the prevailing rate of return on similar investments is 8.5% compounded semi-
annually?
Ans: $1,133.61
 Annuity Due

Question One:

Stephanie intends to contribute $2,500 to her RSP at the beginning of every six months, starting
today. If the RRSP earns 8% compounded semi-annually for the first 7 years and 7%
compounded semi-annually hereafter, what amount will she have in the plant after 20 years?

Ans: $116,327.27 + $106,897.65= $223,224.92

NOTE: when calculating the annuity at different points of time don’t forget to move any past
calculation to the focal date by using the regular compounded future value formula

Question Two:

An automobile manufacturer s calculating he lease payment to charge on the SLX model, which
has a selling price of $27,900. During a month-long promotion, the manufacturer will offer an
interest rate of only 1.8% compounded monthly on a three-years lease. If the residual value is
$14,500, what will be the lease payment assuming a $2,500 down payment.

Ans: $332.5/month

Question Three: Retirement Planning

Justine wants a retirement income of $6000 each month starting from the day she retires and
lasting for 30 years.
How much must she deposit into her retirement savings plan RSP at the end of each month
over the next 35 years to reach her goal?
Assume her RSP savings will earn 9% compounded annually until retirement and 5%
compounded quarterly afterwards.
Ans: FV= $1,124,975.85 PMT = $417.64

Question 4: Perpetuity
Some preferred shares promise a fixed periodic dividends in perpetuity.
a) What is the fair market value of a perpetual preferred share just after payment of a
quarterly $0.50 dividends? the market requires a dividends’ yield 5% compounded
annually on preferred share of similar risk
b) What will be an investor’s annually compounded dividends yield if she is able to
purchase these shares at $36.0 each?

Ans: FMA $40.74 , i = 5.67% compounded annually