2009Homework#1solution-1 - Name: _ NetID: _ HADM 2222 Fall...

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Name: ___________________________________ NetID: _______________________ Prof. Q. Ma, HADM 2222 Fall 2009 1/2 HADM 2222 Fall 2009, Prof. Q. Ma Homework assignment #1 Solutions 1. Interest First City Bank pays 6% simple interest on its savings account balances, whereas Second City Bank pays 6% interest compounded annually. If you made a $5,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years? Solution: The simple interest per year is: $5,000 × .06 = $300 So after 10 years you will have: $300 × 10 = $3,000 in interest. The total balance will be $5,000 + 3,000 = $8,000 With compound interest we use the future value formula: FV = PV(1 + r ) t ; FV = $5,000(1.06) 10 = $8,954.24 The difference is: $8,954.24 – 8,000 = $954.24 2. Assume the total cost of a college education will be $280,000 when your child enters college in 18 years. You presently have $50,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s college education? Solution: FV = PV(1 + r ) t Solving for r , we get: r = (FV / PV) 1 / t – 1 r = ($280,000 / $50,000) 1/18 – 1 = 10.04% 3. You’re trying to save to buy a new $170,000 Ferrari. You have $40,000 today that can be invested at
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2009Homework#1solution-1 - Name: _ NetID: _ HADM 2222 Fall...

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