6. Answer the following: a) Assume annual compounding. You deposit $18,000 in th

Question

6. Answer the following:

a) Assume annual compounding. You deposit $18,000 in the bank today. What is the interest rate that you would earn if you have $25,000 at the end of 10 years?__________________________

b) Assume at the end of year 10, you move this $25,000 to a new investment. Assume the new investment earns 7% interest rate compounded quarterly. How much would you have after the six years?__________________________

7.You deposit equal payments of $1000 in the bank for the next 12 years. Assume the payments are made at the beginning of each year. Assume a 5% interest rate with quarterly compounding.

a) What is the effective rate of this investment?_________

b) How much will you have at the end of 12 years? ________________

c) Is this an annuity?(yes/no)_______ and if so,

d) What type of annuity?(ordinary/due/not an annuity) ________

8. You deposit equal payments of $475 in the bank for the next eight years. Assume the payments are made at the end of each year. Assume quarterly compounding. At the end of eight years, you will have $6,500.

a) What is the effective rate of this investment?______________________

b) What is the nominal rate of this investment?______________________________

c) What is the periodic rate of this investment? __________________________________

Explanation / Answer

Step-1:

Calculation interest:

Deposited amount = $18,000 for 10 years

$18,000 * 3.9% = $702 * 10 years = $7,020

= $18,000 + $7,020

= $25,020

Step-2:

Calculation New investment:

Investment = $25,000

Interest rate = 7%

= $1,750

After six months the investment = $26,750

Step-3:

Deposited amount per year = $1,000 * 12 = $12,000

= Interest rate annually = 10%

$1,000 * 10% = $100 * 12 years = $1,200

At the end of the 12 the year = $13,200

Step-4:

Deposited amount = $475 * 8 = $3,800

Interest rate = 8.9% on deposited amount

= $3,800 * 8.9% = $338 * 8 = $2,700

= $6,500

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