QUIZ SP EkTek 1

1. Ferdi open an account with an initial deposit of $10,000. The account earned 12% compounded monthly the
first 3 years and 15% compounded semi-annually the last 2 years.
Determine the amount in the account when Ferdi withdraws the money 5 years after the first deposit.

Answer:
At the end of 3 years:
F = 10,000 (F/P, 12/12%, 36)* = $14,307.69 ; i =12/12 = 1% ; n = (12)(3) = 36
At the end of 5 years:
F = 13,481.82 (F/P, 15/2%, 4)* = $19,107.48 ; i = 15/2 = 7.5%; n = (2)(2) = 4

2. Jenny bought a $75 used guitar and agreed to pay for it with a single $80 payment at the end of 6 months.
Assuming semi-annual compounding, Determine:
(a) the nominal annual interest rate?
(b) the effective interest rate?

Answer:
F = P (1 + i)n
$80 = $75 (1 + i)1
(1 + i) = $80/$75 = 1.067
i = 0.067 = 6.7%
Nominal Interest Rate = 6.7% (2) = 14.4%
Effective Interest Rate = (1 + 0.067)2 − 1 = 0.138 = 13.8%
3. A truck costs $29,000. A company agrees to purchase such a truck with the understanding that it will make a
single payment for the balance due in 3 years. The vendor agrees to the deal and offers two different interest
schedules. The first schedule uses an annual effective interest rate of 13%. The second schedule uses 12%
compounded continuously.
(a) Which schedule should the company accept?
(b) What would be the size of the single payment?

Answer:

Effective interest rate = e0.12 − 1= 0.127497 or 12.7%. Therefore, choose alternative 2 since 12.54% < 13%.
𝐹=𝑃(𝑒𝑟𝑛 )
F = 25,000(𝑒12%.3 ) = $35833