Question

*PLEASE ANSWER ALL QUESTIONS

Problem 1: A credit car company wants your business. If you use their card, they deposit 1% of all your monetary transactions into a savings account that earns 5% per year. If you spend on average $20,000 dollars a year, how much money will you have in the savings account after 15 years?

Problem 2: Sam wants 2 million dollars in net worth when he retires. In order to achieve this, he plans to invest $10,000 dollars a year, starting now, into an account that earns 10% compound interest. How long does Sam need to wait before he can retire with 2 million?

Problem 3: Americans spend more than they make. A typical household spends $10,000 dollars more than it makes. They do this for 8 years. If this debt will be financed at 15% per year, what annual repayment will be required to repay the debt over a 10- year period?

Problem 4: An interest rate of 21% per year, compounded every 4 months, is equivalent to what effective rate per year? Show hand and spreadsheet solutions.

Problem 5: How much can Wells Fargo lend to a developer who will repay the loan by selling 6 view lots at $190,000 each 2 years from now? Assume the bank will lend at a nominal 14% per year, compounded semiannually

Answer 1

PROBLEM 1

It has been provided tha credit card company has offerred to deposit 1% of the value of annual transactions in a saving account that earns 5% interest.

Average annual transactions = $20,000

Annual deposit to be made by the company = $20,000 * 0.01 = $200

Interest rate earned = 5%

Time period = 15 years

Calculate the money accumulated in savings account after 15 years -

F = A(F/A, i, n)

F = $200(F/A, 5%, 15)

F = $200 * 21.5786

F = $4,315.72

The money you will have in the savings account after 15 years is $4,315.72