E 201 Third Midterm Exam Fall 2016 Three problems, Points 100 Time Allowed 45 mi
ID: 2789127 • Letter: E
Question
E 201 Third Midterm Exam Fall 2016 Three problems, Points 100 Time Allowed 45 min 1a. Linda inherited a sum of $50,000 from one of her great parents. She would like to invest in one of the following three possible investment opportunities for a period of 10 years. Choose the best one for her. 9% per year compounded quarterly. 8.90% per year compounded daily. Ill. 8.95% per year compounded monthly. (15 points) 1b. A "Cash Advance" company in town advertises a loan product "Get $200 today and pay $203 two weeks later" i. What is the (annual) nominal interest rate on this loan? ii. What is the (annual) effective interest rate on this loan? (20 points)Explanation / Answer
1a.
Value of Inheritance = $50,000
a.
Future value after 10 year at 9% interest rate compounded quarterly is calculated below:
Future value = $50,000 × (1 + 9% / 4) ^ (10 × 4)
= $50,000 × 2.4252
= $121,759.45.
Future value after 10 year will be $121,759.45.
b.
Future value after 10 year at 8.909% interest rate compounded daily is calculated below:
Future value = $50,000 × (1 + 8.90% / 365) ^ (10 × 365)
= $50,000 × 2.4349
= $121,743.27.
Future value after 10 year will be $121,743.27.
c.
Future value after 10 year at 9% interest rate compounded Monthly is calculated below:
Future value = $50,000 × (1 + 8.95% / 4) ^ (10 × 4)
= $50,000 × 2.4392
= $121,961.09.
Future value after 10 year will be $121,961.09
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