Question

4) Interest (Show all of your work!) Find the interest rate required for an investment of $10,000 to grow to $15,000 in 5 years if the interest is compounded as follows:

a) Annually

b) Quarterly

5) Inflation (Show all of your work!) Assuming annual compounding, find the time it would take for the general level of prices, in the economy, to double at the following annual inflation rates:

a) 3%

b) 8%

6) Time to Double (Show all of your work!) With an interest rate of 6% and monthly compounding, how long will it take for an investment to double in value?

Answer 1

4) a) Annual compounding

b) Quarterly compounding

n = 5 * 4 = 20

This is an effective quarterly rate.

or r = 2.04801536% * 4 = 8.19206144% per year compounded quarterly.

5) a) 3%

b) 8%

6) Effective monthly rate = 6%/12 = 0.5%

or n = 138.9757216107 / 12 = 11.5813101342 years

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