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WEEK 2 HOMEWORK
P31.
You have $1,500 to invest today at 7 percent interest compounded annually.
a.
How much will you have accumulated in the account at the end of the following number of
years?
1. Three years
2. Six years
3. Nine years
b.
Use your findings in part (a) to calculate the amount of interest earned in
1. the first three years (years 1 to 3)
2. the second three years (years 3 to 6)
3. the third three years (years 6 to 9)
c.
Compare and contrast your findings in part (b). Explain why the amount of interest earned
increases in each succeeding 3year period.
Future Value:
FV
n
= PV
(1 + r)
n
or FV
n
= PV
(FVF
r%,n
)
a. 1.
FV
3
=
PV
(1.07)
3
FV
3
=
$1,500
(1.225)
FV
3
=
$1,837.57
2.
FV
6
=
PV
(1.07)
6
FV
6
=
$1,500
(1.50073)
FV
6
=
$2,251.10
3.
FV
9
=
PV
(1.07)
9
FV
9
=
$1,500
(1.838)
FV
9
=
$2,757.69
b.
1.
Interest earned
=
FV
3
–
PV
Interest earned
=
$1,837.57
1,500.00
$
337.57
2.
Interest earned
=
FV
6
–
FV
3
Interest earned
=
$2,251.10
=
1,837.57
$
413.53
3. Interest earned
=
FV
9
–
FV
6
Interest earned
=
$2,757.69
2,251.10
$
506.59
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c.
The fact that the longer the investment period the larger the total amount of interest collected is
not unexpected and is due to the greater length of time that the principal sum of $1,500 is
invested. The most significant point is that the incremental interest earned per 3 year period
increases with each subsequent 3 year period. The total interest for the first 3 years is $337.57,
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 Fall '09
 MATTHEWHOWARD
 Future Value, Interest, Net Present Value, cash flow stream

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