Question

8. A $75,000 deposit earns 5.65 percent for eight years. If the account loses 2.25 percent per year after that for
two years, what is the value of the account at the end of that second year (tenth year after the initial deposit)?
A. more than $107,800 but less than $108,700
B. more than $108,700 but less than $109,650
C. more than $109,650 but less than $110,400
D. more than $110,400 but less than $111,150
E. more than $111,150 but less than $112,000

18. Assume you borrow $800 from a payday lender. The terms are that you must pay a fee of $25 in advance
(today) and one year from now you need to repay $975. What implied interest rate are you paying?

19. Arnold invested $28,750 in the stock market three years ago with hopes that it would grow to $48,000 in eight
years. Today the investment is valued at $30,286. From this point forward, what annual return would Arnold
need to reach his initial goal of $48,000?

20. A $64,000 deposit earns a nominal rate of 6.48 percent, compounded monthly, for 10 years. If the account
loses 0.40 percent per month after that, how many months will it take to be reduced back to $87,500? (Round
the number of months to the nearest tenth)

Answer 1

8. This question has two parts:

• First we need to grow the deposit at 5.56% for 8 years
• And the the growth rate will become negative 2.25% for 2 years
• Both of these parts can be incorporated in the following equation:
  • 
  • 
  • 
  • As FV is more than 111,150 and less than 112,000 So the correct range is suggested by option E

18. This question basically want to fid out the discount rate which will equate the two CFs to the present value of 800. This can be done by solving the following equation:

19. We need to consider 30286 as the PV and 48000 as the FV and the time to maturity is 5 years remaining from the original investment horizon as 3 years have already passed. Keeping all this in mind we have to solve the following equation:

• 
• 
• 

20. This question has two parts:

• First we need to grow the deposit at 6.48% for 10 years
  • 6.48% is an annual rate
  • Interest is compounded monthly
  • So we need to divide the interest rate by 12
  • In 10 years we will get 12 x 10 = 120 payments
  • Formula incorporating all these points is as follows:
    • 
    • 
• Next this amount will get negative rate of interest
  • rate of interest is -0.4% per month
  • this rate is a monthly rate
  • the FV should be 87500
  • we need to find the number of months
  • 
  • 
  •