4.

pg 62, No(44)
Kyaw Kyaw has K 100000 that he can deposit in any of three savings accounts for a three-year
period. Bank X compounds interest on an annual basis; bank Y compounds interest twice each
year; and bank Z compounds interest each quarter.
All three banks have a stated annual interest rate of 4 percent.
(i) What amount would Kyaw Kyaw have at the end of the third year, leaving all intrest
paid on deposit, in each bank?
(ii) What effective interest rate would he earn in each of the bank?
(iii) Based on your findings in (i) and (ii), which bank should Kyaw Kyaw deal with?
(iv) If a fourth bank--Bank A, also with a 4 percent stated interest rate-compounds interest
continuously, how much would Kyaw Kyaw have at the end of the third year? Does
this alternative change your recommendation in (iii)? Explain why or why not?
(e0.12 = 1.127497)
Solution
(i) Bank X
Principle = P= 100000 Ks
Total number of conversion periods = nm = 3*1 = 3 periods
4%
Interest rate per conversion period = k/m ¿ =0.04
1
Maturity Value = MV =?
k
MV = P(1+ )nm
m
= 100000(1+0.04)3
= 112486.40 Ks
Bank Y
Principle = P= 100000 Ks
Total number of conversion periods = nm = 3*2 = 6 periods
4%
Interest rate per conversion period = k/m ¿ =0.02
2
Maturity Value = MV =?
k
MV = P(1+ )nm
m
= 100000(1+0.02)6
 = 112616.24 Ks
Bank Z
Principle = P = 100000 Ks
Total number of conversion periods = nm = 3*4 = 12 periods
4%
Interest rate per conversion period = k/m ¿ =0.01
4
Maturity Value = MV =?
k
MV = P(1+ )nm
m
= 100000(1+0.01)12
= 112682.50 Ks
(ii) Bank X
k
The effective rate = keff = (1+ )m -1
m
= (1+0.04) -1
= 0.04 *100 = 4%

Bank Y
k
The effective rate = keff = (1+ )m -1
m
= (1+0.02)2 – 1
= 0.0404*100 = 4.04%
Bank Z
k
The effective rate = keff = (1+ )m -1
m
= (1+0.01)4 – 1
= 0.0406*100 = 4.06%

(iii) Among all compound amount and effective rate of interest for each bank, the
compound amount and effective rate of interest for bank Z is the largest.
Hence, Kyaw Kyaw should invest in bank Z.

(iv) Bank A
FVn = PV(ekn)
= 100000 (e(0.04*3)
= 100000*(1.127497)
 = 112750 Ks
Among all future value received from each Bank, the future value from Bank A is
the highest. Hence, Kyaw Kyaw should deposit his money in Bank A.

5.pg 61 No(42)
Six years after Ma Ma put 2500 Kyats in a savings account which earned interest at 2.5%
compounded semiannually, the interest rate was raised to 3% compounded semiannually. How
much was in the account 10 years after the change in the interest rate?

Solution
First 6 years
Principle = P =2500 Ks
2.5 %
Interest rate per conversion period = k/m ¿ = 0.0125
2
Total number of conversion periods = nm = 6*2 = 12 periods
Maturity Value = MV =?
k
MV = P(1+ )nm
m
= 2500(1+0.0125)12
= 2902 Ks

Next 4 years
Principle = P =2902 Ks
3%
Interest rate per conversion period = k/m ¿ = 0.015
2
Total number of conversion periods = nm = 4*2 = 8 periods
Maturity Value = MV =?
k
MV = P(1+ )nm
m
= 2902(1+0.015)8
= 3269.08 Ks
6. pg 31 (Example 37)
Myint Myint Thu Zar signed a note agreeing to pay S$10000 in five years, plus interest at 16%
compounded quarterly. After two and one half years she unexpectedly received an inheritance
and wanted to repay the note. She approached the bank which held the note and was advised that
if she repaid the note early a discount rate of 8%, compounded annually, would be used. What
would early payment to pay off the note?

Solution
Principle = P = S$10000
Total number of conversion periods = nm = 5*4 = 20 periods
16 %
Interest rate per conversion period = k/m ¿ = 0.04
4
Maturity Value = MV =?
k
MV = P(1+ )nm
m
= 10000(1+0.04)20
= S$ 21911.23

Maturity Value = MV = S$ 21911.23

Total number of conversion periods = nm = 2.5*1 = 2.5 periods
8%
Interest rate per conversion period = k/m ¿ = 0.08
1
Proceeds = P =?
k
P =MV(1+ )-nm
m
= 21911.23(1+0.08)-2.5
= S$ 18076.21
 Time Line

5 years

2.5 years 2.5 years

MV=21911.23

Early Payment

Proceeds = ?

Summary Table
Step 1 Step II Step III
Pay (MV) = S$ 21911.23 Receive S$ 18076.21 MV = S$ 21911.23
Borrow = 10000.00 Loans 10000.00 Pay = 18076.21
---------------------- ----------------------
----------------------
Interest S$ 11911.23 Earn S$ 8076.21 Earn S$ 3835.02

Check
8076.21+3835.02=11911.23
7. Mg Mg borrowed $ 500 for 1 month from a loan company. A month later he paid off the loan
with a check for $ 600. What was the rate of compounded monthly charged by the company?
Solution
Principle = P =$ 500
Maturity Value = MV = $ 600
The number of conversion periods per year = m = 12
The nominal interest rate = k =?
Total number of conversion periods = nm =(1/12)*12 = 1 period
k
MV = P(1+ )nm
m
k
(1+ )nm = MV/P
m
(1+k/12)= 600/500
k/12 = 1.2-1
k = 2.4*100=240%