CHAPTER 2: INTEREST RATE

Practice
Problems
PROBLEM 1
What amount must be deposited today in an
account paying 6% per year, compounded
monthly in order to have $2000 in the
account after 5 years?
PROBLEM 2
Jim makes a deposit of $12,000 in a bank account.
The deposit is to earn interest annually at the rate
of 9 percent for seven years.
a) How much will Jim have on deposit at the end of
seven years?
b) Assuming the deposit earned a 9 percent rate of
interest compounded quarterly, how much would he
have at the end of seven years?
c) In comparing parts (a) and (b), what are the
respective effective annual rate? Which alternative
is better?
PROBLEM 3
An investor can make an investment in a real
estate development and receive an expected
cash return of $45,000 after six years.
Based on a careful study of other investment
alternatives, she believes that an 18 percent
annual return compounded quarterly is a
reasonable return to earn on this investment.
How much should she pay for it today?

PROBLEM 4
What is the EAR on your credit card with continuous
compounding if the APR is 18%?

3. PROBLEM 5
You have $300 to invest for four years. Bank A
is offering 5% compounded annually, while
the Bank Bs rate is 4.5% APR, but with daily
compounding. Where do you put your
money?
PROBLEM 6
From which bank will you choose to
borrow money:
A: APR = 12%, semi-annualy
compounded
B: APR = 11.8%, monthly compounded
C: APR = 12.5%, annualy compounded
PROBLEM 7
A given rate is quoted as 12% APR, but has an
effective annual rate (EAR) of 12.55%. What
is the frequency of compounding during the
year?
a. Annually
b. Semiannually
c. Quarterly
d. Monthly
e. Daily

PROBLEM 8
What is the price of a $1000 par value bond
that pays 6% annual interest rate and has 5
years to maturity if the interest rate on
similar bonds is 8%?

PROBLEM 9
What is the price of a zero coupon bond that
has a par value of $1000 and 8 years to
maturity if the interest rate on similar bonds
is 5%?

PROBLEM 10
Suppose you invest $1,000. How many years
you need to have $2,000 with this
investment?