1. Consider the $50,000 excess cash.Assume that Gary invests the funds in a one
ID: 2702345 • Letter: 1
Question
1. Consider the $50,000 excess cash.Assume that Gary invests the funds in a one year CD
a.What is the CD s value at maturity( future calue)if it pays 10 percent(annual) interest?
b. What will its future value be if the CD pays 5 percent interest? If it pays 15 percent interest?
c.BankSouth offers CDs with 10 percent nominal (stated) interest, but compounded semiannually.What is the effective annual rate on this CD>What will the future value be after one year if $50,000 were invested?
d. The Penescola branch of bank of America offers a 10 percent CD with daily compounding. What are the CD s effective annual rate and its value at maturity one year from now if $50,000 is invested?(Assume a 365 day year)
e.What stated rate will BankSouth have to offer to make its semi annual compounding CD competitive with Bank of America s daily compoundin CD?
Explanation / Answer
1. Consider the $50,000 excess cash.Assume that Gary invests the funds in a one year CD
a.What is the CD s value at maturity( future calue)if it pays 10 percent(annual) interest?
Value at maturity = 50000*1.10 = $55000
b. What will its future value be if the CD pays 5 percent interest?
Future Value = 50000*1.05 =52500
If it pays 15 percent interest?
Future Value = 50000*1.15 = $57500
c.BankSouth offers CDs with 10 percent nominal (stated) interest, but compounded semiannually.What is the effective annual rate on this CD?
Effective annual rate = 1.05^2 -1 = 10.25%
What will the future value be after one year if $50,000 were invested?
Future Value = 50000*1.05^2 = $55,125
d. The Penescola branch of bank of America offers a 10 percent CD with daily compounding. What are the CD s effective annual rate
effective annual rate = e^0.10- 1 = 10.5171%
and its value at maturity one year from now if $50,000 is invested?(Assume a 365 day year)
value at maturity one year = 50000*1.105171 = $55,258.55
e.What stated rate will BankSouth have to offer to make its semi annual compounding CD competitive with Bank of America s daily compoundin CD?
rate will BankSouth have to offer to make its semi annual compounding = 1.105171^1/2 -1 *2 = 10.25%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.