Problems

9-1 If you invest $500 today in an account that pays 6 percent interest compounded annually, FV—Lump Sum
how much will be in your account after two years? PV—Lump Sum
9-2 What is the present value of an investment that promises to pay you $1,000 in five years if
you can earn 6 percent interest compounded annually? PV—Different
9-3 What is the present value of $1,552.90 due in 10 years at (1) a 12 percent discount rate and Interest Rates Time to
(2) a 6 percent rate? Double a Lump Sum
9-4 To the closest year, how long will it take a $200 investment to double if it earns 7 percent TVM Comparisons
interest? How long will it take if the investment earns 18 percent?
9-5 Which amount is worth more at 14 percent: $1,000 in hand today or $2,000 due in Growth Rate
six years?
9-6 Martell Corporation’s 2015 sales were $12 million. Sales were $6 million five years earlier. FV—Ordinary
To the nearest percentage point, at what rate have sales grown? Annuity
9-7 Find the future value of the following ordinary annuities:
a. $400 per year for 10 years at 10 percent FV—Annuity Due
b. $200 per year for five years at 5 percent
9-8 Find the future value of the following annuities due:
a. $400 per year for 10 years at 10 percent
b. $200 per year for five years at 5 percent
9-9 Find the present value of the following ordinary annuities: PV—Ordinary
a. $400 per year for 10 years at 10 percent
b. $200 per year for five years at 5 percent Annuity
9-10 Find the present value of the following annuities due:
PV—Annuity Due
a. $400 per year for 10 years at 10 percent

b. $200 per vear for five years at 5 percent

Perpetuity
9-11 What is the present value of a perpetuity of $100 per year if the appropriate discount rate is
7 percent? If interest rates in general were to double and the appropriate discount rate rose to 14
percent, what would happen to the present value of the perpetuity?
 PV—Uneven Cash Flow 9-12 Find the present values of the following cash flow streams under the following Stream
conditions:
Year Cash Stream A Cash Stream B

1 $100 $300
2 400 400
3 400 400
4 300 100

a. The appropriate interest rate is 8 percent.

b. The appropriate interest rate is 0 percent.
FV—Lump Sum. 9-13 Find the amount to which $500 will grow in five years under each of the following
Various conditions:
Compounding a. 12 percent compounded annually
Periods b. 12 percent compounded semiannually
c. 12 percent compounded quarterly
d. 12 percent compounded monthly
PV—Lump Sum. 9-14 Find the present value of $500 due in five years under each of the following conditions:
Various a. 12 percent simple rare, compounded annually
Compounding b. 12 percent simple rare, compounded semiannually
Periods c. 12 percent simple rate, compounded quarterly
d. 12 percent simple rate, compounded monthly
9-15 Find the future values of the following ordinary annuities:
FV—Ordinary a. FV of $400 each six months for five years at a simple rate of 12 percent,
Annuity. Various compounded semiannually
Compounding b. FV of $200 each three months for five years at a simple rate of 12 percent,
Periods compounded quarterly
c. The annuities described in parts (a) and (b) have the same amount of money paid into
them during the five-year period and both earn interest at the same simple rate, yet
the annuity in part (b) earns $101.75 more than the one in part (a) over the five
years. Why does this occur?
9-16 Find the present values of the following ordinary annuities:
PV—Ordinary a. PV of $400 each six months for five years at a simple rate of 12 percent
Annuity. Various compounded semiannually
Compounding b. PV of $200 each three months for five years at a simple rate of 12 percent,
Periods compounded quarterly
c. The annuities described in parts (a) and (b) have the same amount of money paid into
them during the five-year period and both earn interest at the same simple rate, yet
the present value of the annuity in part (b) is $31.46 greater than the one in part (a).
Why does this occur?
9-17 To complete your last year in business school and then go through law school, you will need
$30,000 per year for four years, starting next year (that is, you will need to withdraw the
Required Lump- first $30,000 one year from today). Your rich uncle offers to put you through school, and
Sum Payment he will deposit in a bank paying 7 percent interest annually a sum of money that is
sufficient to provide the four payments of $30,000 each. His deposit will be made today.
a. How large must the deposit be?
b. How much will be in the account immediately after you make the first withdrawal?
After the last withdrawal?
9-18 Sue wants to buy a car that costs $12,000. She has arranged to borrow the total PMT—
purchase price of the car from her credit union at a simple interest rate equal to Loan
12 percent. The loan requires quarterly payments for a period of three years. If Payments
the first payment is due in three months (one quarter) after purchasing the car,
what will be the amount of Sue’s quarterly payments on the loan?
9-19 While Steve Bouchard was a student at the University of Florida, he borrowed Repaying a Loan, n
$12,000 in student loans at an annual interest rate of 9 percent. If Steve repays
$1,500 per year, how long, to the nearest year, will it take him to repay the loan?
9-20 You need to accumulate $10,000. To do so, you plan to make deposits of $1,750 Reaching a
per year, with the first payment being made one year from today, in a bank Financial Goal
account that pays 6 percent annual interest. Your last deposit will be more than
$1,750 if more is needed to round out to $10,000. How many years will it take
you to reach your $10,000 goal, and how large will the last deposit be?
9-21 Jack just discovered that he holds the winning ticket for the $87 million mega TVM Comparisons
lottery in Missouri. Now he needs to decide which alternative to choose: (1) a — Lottery Winner
$44 million lump-sum payment today or (2) a payment of $2.9 million per year
for 30 years. The first payment will be made today. If Jack’s opportunity cost is
5 percent, which alternative should he choose?
9-22 Consider the decision you might have to make if you won a state lottery worth TVM Comparisons
$105 million. Which ivould you choose: a lump-sum payment of $54 million — Lottery Winner
today or a payment of $3.5 million each year for the next 30 years? Which
should you choose?
a. If your opportunity cost is 6 percent, which alternative should you select?
b. At what opportunity cost would you be indifferent between the two
alternatives?
9-23 Suppose that you deposit $1,000 into a savings account that pays 8 percent.
a. If the bank compounds interest annually, how much will you have in your
Future Value
account in four years?
b. What would your balance be in four years if the bank used quarterly com-
pounding rather than annual compounding?
c. Suppose you deposited the $1,000 in four payments of $250 each year
beginning one year from now. How much would you have in your account
after you make the final deposit, based on 8 percent annual compounding?
d. Suppose you deposited four equal payments in your account beginning one
year from today. If you can invest your money at an 8 percent interest rate,
how large would each of your payments have to be for you to obtain the
same ending balance as you calculated in part (a)?
9-24 Assume that you need $1,000 four years from today. Your bank compounds Time Value
interest at an 8 percent annual rate. °f Money
a. How much must you deposit one year from today to have a balance of $1,000 in
your account four years from today?
b. If you want to make equal payments each year, how large must each of the four
payments be if the first deposit is made one year from today?
c. If your father were to offer either to make the payments calculated in part (b) ($221.92)
or to give you a lump sum of $750 in one year, which would you choose?
d. If you have only $750 in one year, what interest rate, compounded annually, would
you have to earn to have the necessary $1,000 four years from today?
e. Suppose you can deposit only $186.29 each for the next four years, beginning in one
year, but you still need $1,000 in four years. At what interest rate, with annual
compounding, must you invest to achieve your goal?
 f.
To help you reach your Si,000 goal, your father offers to give you $400 in one
year. You will get a part-time job and make six additional payments of equal
amounts each six months thereafter. If all of this money is deposited in a bank
that pays 8 percent, compounded semiannually, how large must each of the six
payments be?
g. What is the effective annual rate being paid by the bank in part (f)?
Effective 9-25 Find the interest rates, or rates of return, on each of the following:
Interest Rate. a. You borrow $700 and promise to pay back $749 at the end of one year.
TEAR b. You lend $700 and receive a promise to be paid $749 at the end of one year. C.
You borrow $85,000 and promise to pay back $201,229 at the end of
10 years.
d. You borrow $9,000 and promise to make payments of $2,684.80 per year for five
years.
fEAR versus SIMPLE 9-26 The First City Bank pays 7 percent interest, compounded annually, on time
deposits. The Second City Bank pays 6.5 percent interest, compounded quarterly.
a. Based on effective interest rates, in which bank would you prefer to deposit your
money?
b. Assume that funds must be left on deposit during the entire compounding period to
receive any interest. Could your choice of banks be influenced by the fact that you
might want to withdraw your funds during the year as opposed to at the end of the
year?
r^R and SIMPLE 9-27 Krystal Magee invested $150,000 18 months ago. Currently, the investment is worth
$168,925. Krystal knows the investment has paid interest every three months (i.e.,
quarterly), but she doesn’t know what the yield on her investment is. Help Krystal.
Compute both the annual percentage rate (APR), rSIMPLE, and the effective annual rate
(EAR) of interest, TEAR-
Effective Rate of Return9-28 Your broker offers to sell you a note for $13,250 that will pay $2,345.05 per year for 10
years. If you buy the note, what rate of interest (to the closest percent) will you be
earning?
EAR* rEAR 9-29 A mortgage company offers to lend you $85,000; the loan calls for payments of $8,273.59
per year for 30 years. What is the effective annual interest rate, TEAR, that the mortgage company
is charging you?
Effective Annual Rates 9-30 Bank A pays 8 percent interest, compounded quarterly, on its money market
account. The managers of Bank B want the rate on its money market account to equal Bank
A’s effective annual rate, but interest is to be compounded on a monthly basis. What
simple, or quoted, rate must Bank B set?
Loan Evaluation— 9-31 Suppose you found a house that you want to buy, but you still have to determine what
Mortgage mortgage to use. Bank of Middle Texas has offered a 30-year fixed mortgage that requires
you to pay 6.9 percent interest compounded monthly. If you take this offer, you will have
to pay “3.5 points,” which means you will have to make a payment equal to 3.5 percent of
the amount borrowed at the time you sign the mortgage agreement. Bank of South Alaska
has offered a 30-year fixed mortgage with no points but at an interest rate equal to 7.2
percent compounded monthly. For either mortgage, the first payment would not be made
until one month after the mortgage agreement is signed. The purchase price of the house is
$250,000, and you plan to make a down payment equal to $40,000.
a. If you make a down payment equal to $40,000 and borrow the rest of the purchase
price of the house from Bank of Middle Texas, how much will you have to pay for the
“3.5 points” when you sign the mortgage agreement?
b. Assume that the “points” charged by Bank of Middle Texas can simply be added to the
mortgaged amount so that the total amount borrowed from the
 bank includes the points that must be paid at the time the mortgage is signed
plus the net purchase price of the house (purchase price less the down payment).
For example, the points that apply to a $100,000 mortgage would be $3,500, so
the mortgage amount would be $103,500. Which bank offers the lower monthly
payments?
c. What would the “points” on the Middle Texas Bank mortgage have to equal for you
to be indifferent between the two mortgages?
9-32 Assume that your aunt sold her house on January 1 and that she took a mortgage Loan Amortization in the
amount of $10,000 as part of the payment. The mortgage has a quoted (or simple) interest rate of 10 percent,
but it calls for payments every six months, beginning on June 30, and the mortgage is to be amortized over 10
years. Now, one year later, your aunt must file a Form 1099 with the IRS and with the person who bought the
house, informing them of the interest that was included in the two payments made during the year. (This
interest will be income to your aunt and a deduction to the buyer of the house.) To the closest dollar, what is
the total amount of interest that was paid during the first year?
9-33 Lorkay Seidens Inc. just borrowed $25,000. The loan is to be repaid in equal Amortization
installments at the end of each of the next five years, and the interest rate is Schedule
10 percent.
a. Set up an amortization schedule for the loan.
b. How large must each annual payment be if the loan is for $50,000? Assume that
the interest rate remains at 10 percent and that the loan is paid off over
five vears.

c. How large must each payment be if the loan is for $50,000, the interest rate
is 10 percent, and the loan is paid off in equal installments at the end of
each of the next 10 years? This loan is for the same amount as the loan in part
(b), but the payments are spread out over twice as many periods. Why arc
these payments not half as large as the payments on the loan in part (b)?
9-34 Assume that AT&T’s pension fund managers are considering two alternative Effective Rates
securities as investments: (1) Security Z (for zero intermediate year cash flows), of Return
which costs $422.41 today, pays nothing during its 10-year life, and then pays
$1,000 at the end of 10 years, and (2) Security B, which has a cost today of $500
and pays $74.50 at the end of each of the next 10 years.
a. What is the rate of return on each security?
b. Assume that the interest rate that AT&T’s pension fund managers can earn
on the fund’s money falls to 6 percent immediately after the securities are
purchased and is expected to remain at that level for the next 10 years.
What would the price of each security be after the change in interest rates?
c. Now assume that the interest rate rises to 12 percent (rather than falls to
6 percent) immediately after the securities are purchased. What would the
price of each security be after the change in interest rates? Explain the results.
9-35 Jason worked various jobs during his teenage years to save money for college. PMT—
Now it is his twentieth birthday, and he is about to begin his college studies at Ordinary
the University of South Florida (USF). A few months ago, Jason received a Annuity
scholarship that will cover all of his college tuition for a period not to exceed versus
five years. The money he has saved will be used for living expenses while he is in
college; in fact, Jason expects to use all of his savings while attending USF. The
jobs he worked as a teenager allowed him to save a total of $10,000, which
currently is invested at 12 percent in a financial asset that pays interest monthly.
Because Jason will be a full-time student, he expects to graduate four years from
today, on his twenty-fourth birthday.
 a.
How much can Jason withdraw every month while he is in college if the first
withdrawal occurs today?
b. How much can Jason withdraw every month while he is in college if he waits
until the end of this month to make the first withdrawal?
RSIMPLE- Simple 9-36 Sue Sharpe, manager of Oaks Mall Jewelry, wants to sell on credit, giving
Interest Rate customers three months in which to pay. However, Sue will have to borrow from her
bank to carry the accounts payable. The bank will charge a simple 15 percent interest
rate, but with monthly compounding. Sue wants to quote a simple rate to her
customers that will exactly cover her financing costs. What simple annual rate should
she quote to her credit customers?
Loan Repayment— 9-37 Brandi just received her credit card bill, which has an outstanding balance equal to
Credit Card $3,310. After reviewing her financial position, Brandi has concluded that she cannot pay the
outstanding balance in full; rather, she has to make payments over time to repay the credit
card bill. After thinking about it, Brandi decided to cut up her credit card. Now she wants to
determine how long it will take to pay off the outstanding balance. The credit card carries
an 18 percent simple interest rate, which is compounded monthly. The minimum payment
that Brandi must make each monrh is $25. Assume that the only charge Brandi incurs from
month to month is the interest that must be paid on the remaining outstanding balance.
a. If Brandi pays $150 each month, how long will it take her to pay off the credit card
bill?
b. If Brandi pays $222 each month, how long will it take her to pay off the credit card
bill?
c. If Brandi pays $360 each month, how long will it take her to pay off the credit card
bill?
9-38 Brandon just graduated from college. Unfortunately, Brandon’s education was fairly
Loan Repayment costly; the student loans that he took out to pay for his education total $95,000. The provisions
— Student Loan of the student loans require Brandon to pay interest equal to the prime rate, which is 8 percent,
plus a 1 percent margin—that is, the interest rate on the loans is 9 percent. Payments will be
made monthly, and the loans must be repaid within 20 years. Brandon wants to determine how
he is going to repay his student loans.
a. If Brandon decides to repay the loans over the maximum period—that is,
20 years—how much must he pay each month?
b. If Brandon wants to repay the loans in 10 years, how much must he pay each month?
c. If Brandon pays $985 per month, how long will it take him to repay the loans?
9-39 Assume that you are on your way to purchase a new car. You have already applied and been
accepted for an automobile loan through your local credit union. The loan can be for an amount
up to $25,000, depending on the final price of the car you choose. The terms of the loan call for
monthly payments for a period of four years at a stated interest rate equal to 6 percent. After
Financing selecting the car you want, you negotiate with the sales representative and agree on a purchase
Alternatives— price of $24,000, which does not include any rebates or incentives. The rebate on the car you
Automobile chose is $3,000. The dealer offers “0% financing,” but you forfeit the $3,000 rebate if you take
Loans the “0% financing.” a. What are the monthly payments that you will have to make if you take the
“0% financing”? (Hint: Because there is no interest, the total amount that has to be repaid is
$24,000, which also equals the sum of all the payments.)
 b. What are the monthly payments if you finance the car with the credit union
loan?
c. Should you use the “0% financing” loan or the credit union loan to finance
the car?
d. Assume that it is two years later, and you have decided to repay the amount
you owe on the automobile loan. How much must you repay if you chose the
dealer’s “0% financing”? The credit union loan?
9-40 A father is planning a savings program to put his daughter through college. His Reaching a
daughter is now 13 years old. She plans to enroll at the university in five years, Financial Goal—
and it should take her four years to complete her education. Currently, the cost Saving for College
per year (for everything—food, clothing, tuition, books, transportation, and so
forth) is $12,500, but these costs are expected to increase by 5 percent—the
inflation rate—each year. The daughter recently received $7,500 from her grand-
father’s estate; this money, which is invested in a mutual fund paying S percent
interest compounded annually, will be used to help meet the costs of the daugh-
ter’s education. The rest of the costs will be met by money that the father will
deposit in the savings account. He will make equal deposits to the account in
each year beginning today until his daughter starts college—that is, he will make
a total of six deposits. These deposits will also earn 8 percent interest.
a. What will be the present value of the cost of four years of education at the
time the daughter turns 18? (Hint: Calculate the cost increase, or growth, at
5 percent inflation, or growth, for each year of her education, discount three
of these costs at 8 percent back to the year in which she turns 18, and then
sum the four costs, which include the cost of the first year of college.)
b. What will be the value of the $7,500 that the daughter received from her
grandfather’s estate when she starts college at age 18? (Hint: Compound for
five years at 8 percent.)
c. If the father is planning to make the first of six deposits today, how large
must each deposit be for him to be able to put his daughter through college?
(Hint: Be sure to draw a cash flow timeline to depict the timing of the cash
flows.)
9-41 As soon as she graduated from college, Kay began planning for her retirement. Reaching a
Her plans were to deposit $500 semiannually into an IRA (a retirement fund) beginning Financial Goal
six months after graduation and continuing until the day she retired, which she expected — Saving for
to be 30 years later. Today is the day Kay retires. She just made the last $500 deposit Retirement
into her retirement fund, and now she wants to know how much she has accumulated for
her retirement. The fund earned 10 percent compounded semiannually since it was
established.
a. Compute the balance of the retirement fund assuming all the payments were made
on time.
b. Although Kay was able to make all of the $500 deposits she planned, 10 years ago
she had to withdraw $10,000 from the fund to pay some medical bills incurred by
her mother. Compute the balance in the retirement fund based on this information.
9-42 Sarah is on her way to the local Chevrolet dealership to buy a new car. The list, or
“sticker,” price of the car is $24,000. Sarah has $3,000 in her checking account that she Automobile
can use as a down payment toward the purchase of a new car. Loan
Sarah has carefully evaluated her finances, and she has determined that she can afford Computation
payments that total $4,800 per year on a loan to purchase the car. Sarah can borrow the
money to purchase the car either through the dealer’s special financing package,” which
is advertised as 4 percent financing, or from a local
 bank, which has automobile loans at 12 percent interest. Each loan would be
outstanding for a period of five years, and the payments would be made quarterly
(every three months). Sarah knows the dealer’s “special financing package” requires
that she will have to pay the “sticker” price for the car. But if she uses the bank
financing, she thinks she can negotiate with the dealer for a better price. Assume
Sarah wants to pay $1,200 per payment regardless of which loan she chooses, and the
remainder of the purchase price will be a down payment that can be satisfied with the
money Sarah has in her checking account. Ignoring charges for taxes, tag, and title
transfer, how much of a reduction in the “sticker price” must Sarah negotiate to make
the bank financing more attractive than the dealer’s “special financing package”?
PMT—Retirement Plan 9-43 Janet just graduated from a women’s college in Mississippi with a degree in busi
ness administration, and she is about to start a new job with a large financial services
firm based in Tampa, Florida. From reading various business publications while she was
in college, Janet has concluded that it probably is a good idea to begin planning for her
retirement now. Even though she is only 22 years old and just beginning her career, Janet
is concerned that Social Security will not be able to meet her needs when she retires.
Fortunately for Janet, the company that hired her has created a good retirement and
investment plan that permits her to make contributions every year. Janet is now evaluating
the amount she needs to contribute to satisfy her financial requirements at retirement. She
has decided that she would like to take a trip as soon as her retirement begins (a reward to
herself for many years of excellent work). The estimated cost of the trip, including all
expenses such as meals and souvenirs, will be $120,000, and r will last for one year (no
other funds will be needed during the first year of retirement). After she returns from her
trip, Janet plans to settle down to enjoy her retirement. She estimates she will need
$70,000 each year to be able to live comfortably and enjoy her “twilight years.” The
retirement and investment plan available to employees where Janet is going to work pays
7 percent interest compounded annually, and it is expected this rate will continue as long
as the company offers the opportunity to contribute to the fund. When she retires, Janet
will have to move her retirement “nest egg” to another investment so she can withdraw
money when she needs it. Her plans are to move the money to a fund that allows
withdrawals at the beginning of each year; the fund is expected to pay 5 percent interest
compounded annually. Janet expects to retire in 40 years, and, after taking an online “life
expectancy” quiz, she has concluded that she will live another 20 years after she returns
from her around-the-world “retirement trip.” If Janet’s expectations are correct, how
much must she contribute to the retirement fund to satisfy her retirement plans if she plans
to make her first contribution to the fund one year from today and the last contribution on
the day she retires?

Integrative Problem
TVM Analysis 9-44 Assume that you are nearing graduation and that you have applied for a job with
a local bank. As part of the bank’s evaluation (interview) process, you have been asked to
take an exam that covers several financial analysis techniques. The first section of the test
addresses time value of money analysis. See how you would do by answering the following
questions:
a. Draw cash flow timelines for (1) a $100 lump-sum cash flow at the end of Year 3,
(2) an ordinary annuity of $100 per year for three years, and (3) an uneven cash
flow stream of —$50, $100, $75, and $50 at the end of Years 0 through 3.
b. (1) What is the future value of an initial $100 after three years if it is invested in an
account paying 10 percent annual interest?
(2) What is the present value of $100 to be received in three years if the
appropriate interest rate is 10 percent?
c. We sometimes need to find how long it will take a sum of money (or anything else)
to grow to some specified amount. For example, if a company’s sales are growing
at a rate of 20 percent per year, approximately how long will it take sales to triple?
d. What is the difference between an ordinary annuity and an annuity due?
What type of annuity is shown in the following cash flow timeline? How would
you change it to the other type of annuity?
0 12 3
1 --------------1--------------1---------------1
100 100 100
(1) What is the future value of a three-year ordinary annuity of $100 if the appropriate
interest rate is 10 percent?
(2) What is the present value of the annuity?
(3) What would the future and present values be if the annuity were an annuity
due?
f. What is the present value of the following uneven cash flow stream? The
appropriate interest rate is 10 percent, compounded annually.
0 12 3 4
r -.....................1----------------1-----------------1-----------------1
100 300 300 -50
g. What annual interest rate will cause $100 to grow to $125.97 in three years?
h. (1) Will the future value be larger or smaller if we compound an initial
amount more often than annually—for example, every six months, or
semiannually—holding the stated interest rate constant? Why?
(2) Define the stated, or simple (quoted), rate (SIMPLE)* annual percentage rate
(APR), the periodic rate (rPER.), and the effective annual rate (TEAR)-
(3) What is the effective annual rate for a simple rate of 10 percent, compounded
semiannually? Compounded quarterly? Compounded daily?
(4) What is the future value of $100 after three years under 10 percent semiannual
compounding? Quarterly compounding?
i. Will the effective annual rate ever be equal to the simple (quoted) rate? Explain.
j. (1) What is the value at the end of Year 3 of the following cash flow stream
if the quoted interest rate is 10 percent, compounded semiannually?
0 12 3
1 --------------1-------------------1------------------1
100 100 100
(2) What is the PV of the same stream?
(3) Is the stream an annuity?
(4) An important rule is that you should never show a simple rate on a timeline or
use it in calculations unless what condition holds? (Hint: Think of annual
compounding, when SIMPLE = rEAR = rPER-) What would be wrong with your
answer to parts (1) and (2) if you used the simple rate of 10 percent rather than
the periodic rate of TSIMPLE/2. = 10%/2 = 5%?
k. (1) Construct an amortization schedule for a $1,000 loan that has a
10 percent annual interest rate that is repaid in three equal installments.
 (2) What is the annual interest expense for the borrower and the annual interest
income for the lender during Year 2?
l. Suppose on January 1 you deposit $100 in an account that pays a sinipje or
quoted, interest rate of 11.33463 percent, with interest added (compOUnd’d) daily.
How much will you have in your account on October 1, or after
nine months?
m. Now suppose you leave your money in the bank for 21 months. Thus, on
January 1 you deposit $100 in an account that pays 11.33463 percent com-
pounded daily. How much will be in your account on October 1 of the fol-
lowing year?
n. Suppose someone offered to sell you a note that calls for a $1,000 payment 15
months from today. The person offers to sell the note for $850. You have $850 in a
bank time deposit (savings instrument) that pays a 6.76649 percent simple rare with
daily compounding, which is a 7 percent effective annual interest rate; and you plan
to leave this money in the bank unless you buy the note. The note is nor risky—that
is, you are sure it will be paid on schedule. Should you buy the note? Check the
decision in three ways: (1) by comparing your future value if you buy the note versus
leaving your money in the bank, (2) by comparing the PV of the note with your cur-
rent bank investment, and (3) by comparing the rEAR on the note with that of the bank
investment.
0. Suppose the note discussed in part (n) costs $850 but calls for five quarterly
payments of $190 each, with the first payment due in three months rather than
$1,000 at the end of 15 months. Would it be a good investment?