John Cleaver\'s grandfather died in 2007 and left him a trunk that had been lock

Question

John Cleaver's grandfather died in 2007 and left him a trunk that had been locked in his attic for years. At the bottom of the trunk John found a packet of 50 World War I "liberty bonds that had never been cashed in. The bonds were purcahsed for $11.50 each in 1918 and pay 3% interest as long as they are held.

a. How much were the bonds worth in 2007?

b. How much would they have been worth if they paid interest at a rate more like that paid during the 1970s and 80's, say 7%?

c. Comment on the difference between the answers to parts (a) and (b)

Explanation / Answer

a. 2007 - 1918 = 89 years.
11.50 * 50 = $575 total bonds


Basically, the question is telling you to at 3% interest per year for 89 years, find the future value of $575.

N = 89
I/Y = 3
PV = 575
Compute FV = $7,983.27

b. Canging the interest to 7%

N = 89
I/Y = 7
PV = 575
Compute FV = $237,041.32

c. As we can see, the difference is very significant. This shows us the effects of compound interests  Even a small percentage increase can have a significant impact over a long period of time.

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