1)You have found an investment paying 12% compounded annually. You invest $1,000

Question

1)You have found an investment paying 12% compounded annually. You invest $1,000 today, add $500 at the end of Y2, and $1,000 at the end of Y4. a) how much money will you have at the end of 4 years? b)Create a timeline that reflects the CASH FLOWS in the problem.

2) A friend agrees to lend you $17,500 to start a business on the condition that you agree to repay him $25,000 in 4 years. what is the implied annual interest rate on this loan?

3) Basic bank pays 4% simple interest on deposits and compound bank pays 4% compounded montly. If you deposit $10,000 in each bank how much interest will you have earned at each bank at the end of five years?

Basic Bank:

Compounded Bank:

Explanation / Answer

2)         

FVN   = PV × (1 + i)N      

25,000 = 17500 × (1 + i)4               

(1 + i) 4 = 25,000/17500

i = (1.429) (1/4) -1 = 1.1952 – 1 = 0.1952 or 19.52%

3)basic banks interest is $%simple

so, FVN   = PV × (1 + i)N   

               =10000*(1+0.04)^5

               =$12166.529

copoun interest

1)year Inflow/outflow Opening balance closing balance 0 1000 1000 1120 1 0 1120 1134.4 2 500 1634.4 696.128 3 0 696.128 83.53536 4 1000 83.53536 1010.024243

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