1
Homework #2
IOE 201

Economic Decision Making
Homework #2:
Answers are due Wednesday, September 23, 2009
2 pages, 10 questions:
1.
If interest is compounded quarterly, and the effective annual interest rate is 12.56%,
(a)
What is the interest rate per quarter?
(b)
What is the nominal annual interest rate?
2.
Textbook, page 111, problem 3.1
:
A loan company offers money at 1.5% per month compounded monthly.
(a)
What is the nominal interest rate?
(b)
What is the effective interest rate?
3.
$1,000 is invested for 20 years at interest rate 15% per year, compounded annually.
(a)
Plot the future worth against the number of years from 0 to 20 years.
(b)
Show that the amount at the end of 20 years is over four times the amount at the end
of 10 years.
4.
Textbook, page 75, problem 2.17
:
If $1,000 is invested now, $1,500 two years from now, and $2,000 four years from
now at an interest rate of 8% compounded annually, what will be the total amount in
10 years?
5.
Plot (on the same chart) curves of the difference
(
r
eff

r
)
against
r
(
r
from 0% to
20%), where
r
eff
= effective annual interest rate and
r
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 Fall '09
 DennisBlumenfield
 5%, 9%, 0%, $400, 1.5%

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