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In: Finance

1. Atlantic City is trying to raise money to renovate the boardwalk.  The renovations will occur 5...

1. Atlantic City is trying to raise money to renovate the boardwalk.  The renovations will occur 5 years from now.  The City Planners are making arrangements now to have money on hand to pay for them. To raise the money, they sell 1,000 simple discount notes now. Each note has face value of $500, a simple discount rate of 2%, and a term of 5 years.  The sale of these notes generates income for Atlantic City now.  They invest all the money collected by selling the notes into a 5-year CD that will earn 6% interest compounded monthly. At the end of the 5 years, they collect the results of their investment, pay the $500 owed to each person who bought a discount note, and use the rest for the renovations.  How much money will they have for renovations?

Solutions

Expert Solution

Bought the 1000 discounted Notes of Face value = $500 @2% discount rate for 5 years

Therefore the price of the Each Note = 500/(1.02^5)

= $452.8654/ note

Therefore the total money raised = $452.8654*1000

= $452,865.4049

This money raised is invested in the CD of face value = $500 @6% compounded monthly of term 5 years.

How many they could buy CD = Money invested/PV of CD

= $452,865.4049/($500/(1.06^5))

= 1,212.07 or 1,212 (approx)

Future Value of the CD investments after 5 years = Number of CD baught*Face Value of CD

= 1,212 * 500

= $606,000.00

Therefore Money left for the renovation after paying off the Creditors = $452,865.4049 - $606,000

= $153,134.60

jeff jeffy answered 2 years ago
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