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Chapter 2 and Chapter 4 Assignment

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Chapter 2 and Chapter 4 Assignment

Chapter 2

Problem 2-1)

We have acquired new furniture for the office. The invoice for $6,000 offers two ways to pay:

we can pay the entire amount by September 1, or we can pay $3,060 by September 1 and

$3,000 by January 1. How does our decision depend on the interest rate at which we can

invest our funds?

The payment process has two options; Option 1 is to pay $6,000 on 1st September and Option 2

is to pay $3,060 on 1st September and pay $3,000 on 1st January. This means that the amount due

on 1st January, that is, $2,940 is to be paid at $3,000 over the 4 months. Therefore;

The present value = $2,940

Future value = $3,000

Interest rate =?

Number of periods = 4 months

Future value =Present value(1+r )n

4 / 12
$ 3,000=$ 2,940(1+r )

r =6.1224 %

The interest rate applied to the payment in option 2 is 6.1224% per annum. Thus, this rate will

influence the option that is likely to be taken before the purchase of the furniture.

Chapter 4

Question 2)

The chief cashier of a bank must manage the cash holding to gain interest by investing excess

cash where possible, but at the same time keep sufficient cash on hand to meet the bank's
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needs. A major issue for the chief is the uncertainty that results from the Federal Reserve

Board's (the Fed's) clearing balance. The clearing balance is the difference between the

dollar value of checks written by the bank's customers and cleared through the Fed, and the

dollar value of checks received but written on the other banks and clear through the Fed.

The chief cashier has recorded the last eight weeks of clearing balances (a longer period is

available, but we will use just eight weeks here). The 40 observations of daily check clearing

are shown below:

$ 21,697,208 $ (10,243,791) $ 37,844,391 $ (3,648,650) $ 3,894,647

$ (32,977,193) $ 30,056,844 $ 81,001,561 $ 73,625,609 $ 5,027,402
$ 60,311,999 $ 117,896,711 $ 57,425,429 $ 34,537,810 $ 21,449,620
$ 29,981,227 $ (1,672,896) $ 28,157,292 $ 5,757,982 $ 31,467,912
$ 28,030,404 $ 24,650,044 $ 10,019,384 $ 40,873,515 $ 31,238,163
$ (8,448,464) $ 61,116,423 $ 21,886,686 $ 59,296,515 $ 23,307,164
$ 53,479,593 $ (4,794,679) $ 27,584,465 $ 29,387,165 $ 93,434,414
$ 38,561,233 $ 24,066,627 $ 8,059,567 $ (31,816,724) $ 65,555,653

1. Provide point and interval estimates of the mean daily clearing balance.

To find the point and interval estimates for the mean daily clearing balance, the point estimate

for the population mean is represented by the sample mean whereas the intervals are represented

by the upper and the lower limit as shown in the table below;

Data  
Sample Standard Deviation $ 31,693,646.28
Sample Mean $ 29,676,957
Sample Size 40
Confidence level 95%
Standard error of the mean 5011205.481
Degree of freedom 39
t-value 2.003E-268
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Interval half width 10136119.82

Interval lower limit $ 19,540,836.73
Interval upper limit $ 39,813,076

As such, the point estimate is $29,676,957 whereas the upper limit interval is $39,813,076 and

the lower limit interval is $19,540,836.73.

2. Provide point and interval predictions (or forecasts) of tomorrow’s clearing balance.

From the above observation, the point estimate is the sample mean of the data set when the upper

limit has been included in the sample and the interval predictions will be the upper limit and the

lower limit in the data set. The resulting data is given in the table below;

Data  
Sample Standard Deviation $ 31,334,979.03
Sample Mean $ 29,924,179
Sample Size 41
Confidence level 95%
Standard error of the mean 4893701.554
Degree of freedom 40
t-value 2.56E-279
Interval half width 9890539.777
Interval lower limit $ 20,033,639.21
Interval upper limit $ 39,814,719

Therefore, the forecasted point estimate is $29,924,179 while the forecasted intervals are

$39,814,719 and $20,033,639.21