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Tutorial 5 1. Sandy buys a $500 26-week T-bill and a $10,000 52-week T-bill. He pays $9500 combined for the 2 T-bills. Calculate the internal rate of return (or yeild rate) expressed as an annual effective rate of interest. 2. Karen loans her brother Terry $12,000. The loan is to be repaid by equal monthly installments over 10 years, calculated at i u 12 U u 0%. Karen deposits the money received from her brother into her savings account. If Karen’s savings account earns an effective rate of interest of 4% for the first 6 years and an effective rate of interest of 3% for the last 4 years calculated the effective annual yield that Karen has earned over the 10 years. How much more money would Karen have if she did not lend her brother the money? Solutions 1. R 0 u u 9500, R 1 u 500 and R 2 u 10,000 u 9500 U 500 v 1 2 U 10000 v u 0 100 v 1
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Unformatted text preview: 2 u 95 100 v 1 2 U 100 u ± v 1 2 u .95 ± u 1 U i U u 1/2 u .95 i u u .95 U u 2 u 1 u 10.80% 2. The loan is repaid by 120 monthly payments of $100. The effective rate per month during the 1st 6 years is j u 1.04 1/12 u 1 u 0.32737%. The account balance after 6 years (72 months) is 100 s 72|0.32737% u 8104.46. The effective rate per month during the last 4 years is j u 1.03 1/12 u 1 u 0.24663%. The account balance after 10 years (120 months) is 100 s 72|0.32737% u 1.03 U 4 U 100 s 48|0.24663% u 9,121.64 U 5,089.01 u 14,210.66 12,000 u 1 U i U 10 u 14,210.66 ± i u 14,210.66 12,000 1/10 u 1 u 1.71% (annual effective yield) Balance if the money was not loaned: 12,000 u 1.04 U 6 u 1.03 U 4 u 17,089.53 Difference 17,089.53 u 14,210.66 u 2878.87...
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This note was uploaded on 02/07/2010 for the course ACTSC 231 taught by Professor Chisholm during the Spring '09 term at Waterloo.

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