Question

Do not answer using a percent sign, a dollar sign or with a number containing commas. For the questions involving rates, you can answer as a percent (for example 10) or as a decimal (for example 0.1).

1.7

Suppose you purchase a $1,000 bond which pays 8% per annum compounded quarterly. What is your effective annual interest rate?

1.8

Assume you purchase a house today for $100,000. You expect real estate to grow at 8% per year. How many years would it take for your house to double in value?

1.9

Suppose you purchase an investment that doubles in 12 years. What was the approximate growth rate for the investment?

Answer 1

1.7

Effective annual rate = (1 + Rate / Period)^Period - 1

= (1 + 8%/4)^4 -1 = 8.24%

1.8

Future value = Double of current value = 2 * 100000 = 200000

Present value = 100000

Rate = 8%

We can calculate for the number of years with the help of Nper function of Excel

=NPER(0.08,0,-100000,200000,0)

= 9.01 years

1.9

FV = PV * (1 + R)^N

Lets assume that PV = $1, and hence we can conclude that FV = $2 (since it doubles)

2 = 1 * (1 + Rate)^12

(1 + Rate)^12 = 2

(1 + Rate) = 2 ^(1 /12)

(1 + Rate) = 1.0595

Rate = 5.95%