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or withdrawn.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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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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