Question

5. Consider a newlywed who is planning a wedding anniversary gift of a trip to Dubai for her
husband at the end of 10 years. She will have enough to pay for the trip if she invests $5,000
per year until that anniversary and plans to make her first $5,000 investment on their first
anniversary. Assume her investment earns an 8 percent interest rate, how much will she have
saved for their trip if the interest is compounded in each of the following ways?
a. Annually
b. Quarterly
c. Monthly
6. If you applied for a loan of $10,000 from two different banks, and Bank Y makes an offer to
charge interest of 7% compounded monthly and Bank Z offers you 8% annual interest due at the
end of the year. What will be the difference in the Effective Interest Rate charged by the two
banks?
7. Your grandfather left an inheritance for you of $50,000. However you can only drawdown on
the investment as follows:
Years 1 – 4 $10,000 and
Year 5 $40,000
Interest on the fund is 7.5%. What is the present worth of this inheritance?
8. Your choice of vehicle is the Honda CRV, which you plan to purchase in 5 years time after you
have completed your studies. You plan to save a certain sum of money every quarter for the
next 5 years, and the bank offers you a rate of 8% per annum on your savings. How much do
you need to save every quarter to meet the price of your vehicle which is $150, 000.

Answer 1

		Question 5
	a	Annually
	Pmt	Annual Investment	$5,000
	Nper	Number of years of investment	10
	Rate	Annual interest rate	0.08
	FV	Amount of savings at end of 10 years	$72,432.81	(Using FV function of excel with Rate=0.08,Nper=10,Pmt=-5000)
	b	Quarterly
		Annual Effective Interest =((1+(0.08/4))^4)-1		0.08243216
	Pmt	Annual Investment	$5,000
	Nper	Number of years of investment	10
	Rate	Annual interest rate	0.082432
	FV	Amount of savings at end of 10 years	$73,274.78	(Using FV function of excel with Rate=0.082432,Nper=10,Pmt=-5000)
	c	Monthly
		Annual Effective Interest =((1+(0.08/12))^12)-1		0.0830
	Pmt	Annual Investment	$5,000
	Nper	Number of years of investment	10
	Rate	Annual interest rate	0.083000
	FV	Amount of savings at end of 10 years	$73,472.74	(Using FV function of excel with Rate=0.083000,Nper=10,Pmt=-5000)
		Question 6
		Effective interest rate of bank Z	8%
		Effective interest rate of bank Y
		((1+(0.07/12))^12)-1=	0.072290081
		Effective interest rate of bank Y	7.23%
		Difference in effective interest rate	0.77%
		Question 7
		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=7.5%=0.075
		N=Year of Cash Flow
	N	Year		1	2	3	4	5	SUM
	A	Cash Flow		$2,500	$2,500	$2,500	$2,500	$40,000	$50,000
	B=A/(1.075^N)	Present Value (PV) of Cash Flow:		$2,325.58	$2,163.33	$2,012.40	$1,872.00	$27,862.35	$36,236
		Present Worth of the inheritance	$36,236
		Question 8
	Fv	Price of the Vehicle	$150,000
	Nper	Number of quarters of investment	20	(5*4)
	Rate	Quarterly interest=(8/4)%=	2%
	PMT	Quarterly savings needed	$6,173.51	(Using PMT function of excel with Rate=2%,Nper=20,Fv=-150000)