Question

1. Assume the total expense for your current year in college equals $25,000. Approximately how much would your parents have needed to invest 25 years ago in an account paying 4.5% compounded annually to cover this amount?

2. Your Capital Two credit card account charges interest at the rate of 1.85% per month. You would pay an effective annually compounded rate of _______ and an APR of _______.

3. How much money will you have in your bank account in 12 years if you deposit $4,000 today and can get 2% per year in interest?

4. What is the present value of your trust fund if it promises to pay you $44,000 on your 30th birthday (7 years from today) and earns 5% compounded annually?

5. Your broker promises that if you give her $15,000 today she will return $30,000 to you in five years. To the nearest percent, what annual interest rate is being offered?

Answer 1

Part 1:

Current amount (Future Value)= $25,000

Amount required to be invested 25 years ago is the ‘Present Value’ at that time, calculated at $8,318.26

as follows:

Part 2:

Monthly interest rate=1.85%

Effective annually compounded rate=[ (1+1.85%)^12]-1 = (1.0185^12)-1= 1.246041-1 =24.6041%

APR (Nominal) = 1.85%*12= 22.2% (Compounded monthly)

Part 3:

Money in bank account after 12 years is the Future Value, calculated at $5,072.97 as follows:

Part 4:

Present value of $44,000 to be received in 7 years is $ $31,269.98 calculated as follows:

Part 5:

Annual interest rate offered is 14.869835% as follows: