a) What is the effective annual interest rate of an investment that pays 8.1% an

Question

a) What is the effective annual interest rate of an investment that pays 8.1% annual interest compounded semi-annually?

b) The following describes the conditions of an ordinary annuity, with interest compounded with each payment and payments made at the end of the compounding period. Find the accumulated amount of the annuity. $1200 monthly payments at 7.9% for 25 years.

c) Suppose that on January 1, 1884, one of your ancestors invested $36 compounded annually at 4.5%. If this money were left to you, how much money would you have had on January 1, 2014?

d) Find the term of a loan of $1672 at 5.3% if simple interest is $73.85.

Explanation / Answer

a) effective rate = (1+.081/2)^2 - 1 = 8.264%

b) FV= 1200*FVIFA(7.9,25) = 72.0468*1200 = $86456.16

c) FV = 36*(1.045)^30 = 11000.69

d) let amount of principal on which interest incure is x

5.3% of x = 73.85

x = 73.85/.053 = 1393.39

amount of principal paid = 1672-1393.39 = $278.61

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