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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 Fall '09
 DennisBlumenfield
 Interest, bank account, future worth

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