1. What nominal rate compounded annually would
quadruple the principal in 4
2. A master card compounds monthly and charges an interest of 1.5% per month.
What is the effective interest rate per year?
3. How long will it take money to triple itself if invested at 8% compounded
4. Microsoft CEO, billionaire Bill Gates willed that a sum of $25 million be given to a
child but will be held in trust by the child’s mother until it amounts to $45 million. If
the amount is invested and earns 8% compounded quarterly, when will the child
receive the money?
5. A credit plan charges interest rate of 36% compounded monthly. Find its effective
6. Find the amount at the end of two years and seven months if P1000 is invested
at 8% compounded quarterly using simple interest for anytime less than a year
7. A P2000 loan was originally made at 8% simple interest for 4 years. At the end of
this period the loan was extended for 3 years without the interest being paid, but
the new interest rate was made 10% compounded semiannually. How much
should the borrower pay at the end of 7 years?
1) Let interest rate be "r" compounded annually
4P = P * (1 + r)^4
4 = (1 + r)^4
Taking (1/4) of the root on both sides:
1 + r = 1.4142
r = 0.4142 which is 41.42%
2) Interest rate = 1.5% per month
Annual effective rate of interest: [1 + Monthly rate of Interest]^Number of compounding done in an year = [1 + 0.015]^12 = 1.1956 which is 19.56%
3) Let interest rate be "r" compounded annually
3P = P * (1 + r)^3
3 = (1 + r)^3
Taking (1/3) of the root on both sides:
1 + r = 1.4422
r = 0.4422 which is 44.22%
4) Interest rate = 8% compounded quarterly which means annual effective rate of interest is [1 + (8% / 2)]^4 = 1.0824 which is 8.24%
Amount Invested = 25 million
45 = 25 * 1.0824^n where "n" is number of years after which child recieve the money
n = 7.42 years
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