ASSIGNMENT # 02

Answer all the problems with complete solution and analysis.

I. Equivalence
1. What sum of money now is equivalent to $8250 two years hence, if interest is 4%
per 6-month period?

2. AC-Delco makes auto batteries available to General Motors dealers through

privately owned distributorships. In general, batteries are stored throughout the
year, and a 5% cost increase is added each year to cover the inventory carrying
charge for the distributorship owner. Assume you own the City Center Delco
facility. Make the calculations necessary to show which of the following
statements are true and which are false about battery costs.
a. The amount of $98 now is equivalent to a cost of $105.60 one year from now.
b. A truck battery cost of $200 one year ago is equivalent to $205 now.
c. A $38 cost now is equivalent to $39.90 one year from now.
d. A $3000 cost now is equivalent to $2887.14 one year ago.
e. The carrying charge accumulated in 1 year on an investment of $2000 worth of
batteries is $100.

II. Simple and Compound Interest

1. How much interest is earned in one year on a principal of $560 if the annual
interest rate is 6%?
2. What is the annual interest rate of $88 interest is paid in a year on a principal of
$2200?
3. How much money must be invested for a year at 7% in order to earn $249.50
interest?
4. A sum of $2500 is left for two years in a bank that pays an annual interest rate of
5%. How much interest is earned?
5. If you have twice as much invested at 7% as at 5% and if your annual interest
income from these two investments is $950, how much have you invested at
each rate?
6. Kelly plans to put her graduation money into an account and leave it there for 4
years while she goes to college. She receives $750 in graduation money that she
puts it into an account that earns 4.25% interest compounded semi-annually.
How much will be in Kellys account at the end of four years?
7. ABC Bank is offering to double your money! They say that if you invest with them
at 6% interest compounded quarterly they will double your money. If you invest
$1500 in the account, how long will it take to double your money?
8. William wants to have a total of $4000 in two years so that he can put a hot tub
on his deck. He finds an account that pays 5% interest compounded monthly.
How much should William put into this account so that hell have $4000 at the
end of two years?
 9. If $8000 is invested in an account that pays 4% interest compounded
continuously, how much is in the account at the end of 10 years?
10. How long will it take $4000 to triple if it is invested at 5% compounded
continuously?
11. Part of Dollar Bill's $4000 is invested in a bank at 6% and the other part in 8%
interest - yielding bonds. His annual income from the two sources is $260. How
much has Bill in the bank?
12. Smart Sam invests $1000 more at 9% than in a safer investment at 6%. He
earns the same as if the entire amount were invested at 8 1/2%. How much has
Sam invested at 6%?
13. You have $50,000 to invest, and two funds that you'd like to invest in. The You-
Risk-It Fund (Fund Y) yields 14% interest. The Extra-Dull Fund (Fund X)
yields 6% interest. Because of college financial-aid implications, you don't think
you can afford to earn more than $4,500 in interest income this year. How much
should you put in each fund?"

14. The formula for interest that is compounded continuously is

A represents the amount of money after a certain amount of time

P represents the principle or the amount of money you start with
r represents the interest rate and is always represented as a decimal
t represents the amount of time in years

Suppose $5000 is put into an account that pays 4% compounded continuously.

How much will be in the account after 3 years?
15. How much will $12,000 be after 5 years if compounded continuously at 7% rate?

III. Repayment Schedule. (Refer to the sample discussed last meeting.)

Demonstrate the concept of equivalence using the different loan repayment plans
described below. Each plan repays a $10000 loan in 5 years at 6% interest per year.

Plan 1: Simple interest, pay all at end. No interest or principal is paid until the end of
year 5. Interest accumulates each year on the principal only.
Plan 2: Compound interest, pay all at end. No interest or principal is paid until the
end of year 5. Interest accumulates each year on the total of principal and all accrued
interest.
Plan 3: Simple interest paid annually, principal repaid at end. The accrued interest
is paid each year, and the entire principal is repaid at the end of year 5.
Plan 4: Compound interest and portion of principal repaid annually.
The accrued interest and one-fifth of the principal (or $1000) is repaid each year. The
outstanding loan balance decreases each year, so the interest for each year decreases.
Plan 5: Equal payments of compound interest and principal made annually. Equal
payments are made each year with a portion going toward principal repayment and the
remainder covering the accrued interest. Since the loan balance decreases at a rate
slower than that in plan 4 due to the equal end-of-year payments, the interest
decreases, but at a slower rate.