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appendix

# appendix - APPENDIX COMPOUND INTEREST CONCEPTS AND...

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A-1 Odd-numbered Solutions APPENDIX COMPOUND INTEREST: CONCEPTS AND APPLICATIONS Questions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions A.1 See the text or the glossary at the end of the book. A.3 In simple interest, only the principal sum earns interest. In compound interest, interest is earned on the principal plus amounts of interest not paid or withdrawn. A.5 The timing of the first payment for an annuity due is now (at the beginning of the first period) while that for an ordinary annuity is at the end of the first period. The future value of an annuity due is computed as of one year after the final payment, but for an ordinary annuity is computed as of the time of the last payment. A.7 Present values increase when interest rates decrease and present values decrease when interest rates increase. A.9 The formula assumes that the growth [represented by the parameter g in the formula 1/( r g )] continues forever. That is a long time. The formula assumes also that the discount and growth rates remain constant. In our experience, more harm results from assuming the growth persists forever than from the other assumptions. A.11 a. \$150,000 X .62741 = \$94,112. b. \$150,000 X .54027 = \$81,041. A.13 a. ¥45,000,000/10.63663 = ¥4.23 million. b. ¥45,000,000/12.29969 = ¥3.66 million. A.15 a. £145,000/4.62288 = £31,366. b. £145,000/4.11141 = £35,268.

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Odd-numbered Solutions A-2 A.17 (Effective interest rates.) a. 12 percent per period; 5 periods. b. 6 percent per period; 10 periods. c. 3 percent per period; 20 periods. d. 1 percent per period; 60 periods. A.19 a. \$100 X .30832 = \$30.83. b. \$250 X .53063 = \$132.66. c. \$1,000 X .78757 = \$787.57. A.21 a. \$1,000(1.00 + .94340) + \$2,000(4.21236 – .94340) + \$2,500(6.80169 – 4.21236) = \$14,955. b. \$1,000(1.00 + .92593) + \$2,000(3.99271 – .92593) + \$2,500(6.24689 – 3.99271) = \$13,695. c. \$1,000(1.00 + .90909) + \$2,000(3.79079 – .90909) + \$2,500(5.75902 – 3.79079) = \$12,593. A.23
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appendix - APPENDIX COMPOUND INTEREST CONCEPTS AND...

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