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IOE+201+Homework+1+_corrected+version_ - Homework#1 IOE 201...

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Homework #1 IOE 201 - Economic Decision Making Homework #1: Answers are due Wednesday, September 16, 2009 1. A given principal P earns compound interest annually, with interest rate i per year. We showed in class that the future worth F at the end of N years is N i P F ) 1 ( + = (a) How much interest is earned in year N +1 ? (b) Using (a), show that the formula for the future worth at the end of N +1 years is 1 ) 1 ( + + = N i P F 2. Textbook, page 73, Problem 2.3 : Compare the interest earned on $10,000 for 20 years at 7% simple interest with the amount of interest earned if interest were compounded annually. 3. Textbook, page 74, Problem 2.11: Assuming an interest rate of 8% compounded annually, answer the following questions: (a) How much money can be loaned now if $6,000 is to be repaid at the end of five years? (b) How much money will be required in four years in order to repay a $15,000 loan borrowed now? 4. A borrower gets a loan for $10,000 to be paid back with interest after 5 years. The interest rate is 16% per year. The interest is compounded annually, but the borrower
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