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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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