Test

Draw a Time Diagram for each problem. Show ALL work - including calculator inputs.

(10pt.) #1 You make $200 quarterly deposits into an account earning 8% compounded quarterly. If the first
deposit is made on January 23, 1999 and the last deposit is made on April 23, 2002, how much is
in the account on July 23, 2002?

(20pt.) #2 Converting compound interest rates. You don't need to draw a time diagram for this problem.

(a) 5.75% compounded quarterly is equivalent to what rate compounded annually?

(b) 10% compounded daily (use Banker's Rule) is equivalent to what rate compounded
semiannually?

(20pt.) #3 Jan and Rob want to save $25,000 for a down payment on their dream home. If their account
earns 7% compounded monthly...

(a) How many full monthly deposits of $400 will they need to make?

(b) What is the size of the smaller concluding deposit?

(20pt.) #4 Sam deposits $1000 into his savings account each year for 10 years. If his account earns 6%
compounded monthly, how much will be in his account just after his last deposit?

(15pt.) #5 Frank payed off his $10,000 loan in just 5 years by making $250 payments at the end of each
month. What interest rate (compounded monthly) was he charged?

(15pt.) #6 Bob will have $250,000 in his savings account by the time he turns 55. His savings account earns
6% interest compounded annually. How much can he withdraw each year for 15 years if he
makes his first withdrawl when he turns 66?
You make $200 quarterly deposits into an account earning 8% compounded quarterly. If the first deposit is
made on January 23, 1999 and the last deposit is made on April 23, 2002, how much is in the account on
July 23, 2002?

1/23/1999 to 1/23/2002 is 3 years ( = 12 quarters). 1/23/2002 to 7/23/2002 is 6 months ( = 2 quarters). Thus

N = 12 + 2 =14 quarters.

Begin Mode
PV 0
FV ?
I/YR 8
P/YR 4
PMT 200
N 14

FV = -3,258.68

Answer: Their will be $3,258.68 in your account on July 23, 2002.

Converting compound interest rates. You don't need to draw a time diagram for this problem.

(a) 5.75% compounded quarterly is equivalent to what rate compounded annually?

NOM% 5.75
P/YR 4
EFF% ?

EFF% = 5.87517683 (this is our answer since effective rates are compounded annually)

Answer: 5.75% c.q. is equivalent to 5.8752% c.a.

(b) 10% compounded daily (use Banker's Rule) is equivalent to what rate compounded semiannually?

Banker's Rule tells us to use 360 days for 1 year, thus P/YR = 360.

NOM% 10
P/YR 360
EFF% ?

EFF% = 10.51555714 (now we must shift back from compounding annually to compounding semiannually)

NOM% ?
P/YR 2
EFF% 10.51555714
NOM% = 10.25275945

Answer: 10% c.d. is equivalent to 10.5156% c.a. which is equivalent to 10.2528% c.s-a.

Jan and Rob want to save $25,000 for a down payment on their dream home. If their account earns 7%
compounded monthly...

Step 1: Find N.

End Mode
PV 0
FV -25,000
I/YR 7
P/YR 12
PMT 400
N ?

N = 53.44369648 (Note: this will still work with FV = 25,000 and PMT = -400).

So we use N = 53.

(a) How many full monthly deposits of $400 will they need to make? Answer: 53 full monthly payments of
$400.

Step 2: Find balance after N (=53) months.

End Mode
PV 0
FV ?
I/YR 7
P/YR 12
PMT 400
N 53

FV = -24,758.8306348

Thus the balance after 53 months is $24,758.83. Now we push this balance forward in time 1 more month...

PV 24,758.83
FV ?
I/YR 7
P/YR 12
PMT 0
N 1

FV = -24,903.2565083 (Note: we could also use simple interest to for this computation since we are
working within 1 period).
Thus the balance after 54 months is $24,903.26 so if we are to have $25,000 in the account we must deposit
an extra $25,000 - $24,903.26 = $96.74.

Here's another way to get the answer...

End Mode
PV 24,758.83
FV -25,000
I/YR 7
P/YR 12
PMT ?
N 1

Final payment is: PMT = 96.74349167

OR Step 2: Find the balance after N+1 (= 54) months.

End Mode
PV 0
FV ?
I/YR 7
P/YR 12
PMT 400
N 54

FV = -25,303.26. But we only need $25,000 thus we deposited $303.26 too much. So our final payment
should have been: 400 - 303.26 = $96.74

(b) What is the size of the smaller concluding deposit? Answer: On the 54th month we will need to deposit
$96.74 to bring the balance up to $25,000.

Sam deposits $1000 into his savings account each year for 10 years. If his account earns 6% compounded
monthly, how much will be in his account just after his last deposit?

First we must convert our nominal rate of 6% compounded monthly to a rate compounded annually (to
match up with the deposits).

NOM% 6
P/YR 12
EFF% ?

EFF% = 6.16778119 (recall that effective rates are compounded annually - so this is the rate we will use).

Therefore, I/YR = 6.1678 (I'll round to 4 decimal places - should be accurate enough).
End Mode
PV 0
FV ?
I/YR 6.1678
P/YR 1
PMT 1,000
N 10

FV = -13,285.1252977 (if a more accurate I/YR is used the answer is -13,285.11...)

Answer: He will have $13,285.13 in his account after his 10th deposit of $1,000.

Frank payed off his $10,000 loan in just 5 years by making $250 payments at the end of each month. What
interest rate (compounded monthly) was he charged?

5 years is 5 x 12 = 60 months.

End Mode
PV 10,000
FV 0
I/YR ?
P/YR 12
PMT -250
N 60

I/YR = 17.27373720 (Note: again you could have used PV = -10000 and PMT = +250)

Answer: He was charged 17.2737% interest compounded monthly (not very good - probably a credit card).

Bob will have $250,000 in his savings account by the time he turns 55. His savings account earns 6%
interest compounded annually. How much can he withdraw each year for 15 years if he makes his first
withdrawl when he turns 66?

PV 250,000
FV ?
I/YR 6
P/YR 1
PMT 0
N 10

FV = -447,711.924136

So he has $447,711.92 in his account when he turns 55 + 10 = 65 years old.

End Mode
PV 447,711.92
FV 0
I/YR 6
P/YR 1
PMT ?
N 15

PMT = -46,097.6567389

Answer: He can withdrawl $46,097.66 each year for 15 years starting when he turns 66.

Alternate solution...

PV 250,000
FV ?
I/YR 6
P/YR 1
PMT 0
N 11

FV = -474,574.639584

So he has $474,574.64 in his account when he turns 55 + 11 = 66 years old.

Begin Mode
PV 474,574.64
FV 0
I/YR 6
P/YR 1
PMT ?
N 15

PMT = -46,097.6572052 (which gives the same answer.)