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MA170wk5solns

# MA170wk5solns - MA170 Week 5 Compound Interest Part II...

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MA170 Week 5: Compound Interest - Part II Name: ____SOLUTIONS____________ Lab: Fall 2010 1. [6 marks ] Consider an investment opportunity offering an interest rate of j 1 = 5% : (a) How much must be invested on November 1, 2010 to accumulate to \$10 000 by August 1, 2012 at the given rate of interest? There is one full year and 273 days between Nov.1 2010 and Aug. 1 2012: OR: 1 year 9 months t = 1 + 273 365 = 638 365 t = 1 + 9 12 = 21 12 P = 10000 e ° 638 = 365(0 : 05) : = \$9163 : 13 P = 10000 e ° 21 = 12(0 : 05) : = \$9162 : 19 (b) If \$1000 is invested at this rate of interest, what will the investment be worth in 6 months time? S = 1000 e 0 : 05(6 = 12) : = \$1025 : 32 (c) Assuming that in°ation will be 2% over the next year, what is the real rate of interest? e 0 : 05 = 1 + j ) j = e 0 : 05 ° 1 : = 0 : 051271096 i real = 0 : 051271096 ° 0 : 02 1 + 0 : 02 = 0 : 03065793725 = 3 : 07% 2. [15 marks ] Canada Premium Savings Bonds are 10 year investment instruments issued by the government of Canada. They can be purchased in denominations of \$100, \$300, \$500, \$1000, \$5000 and \$10 000 and are cashable on each anniversary and 30 days thereafter.The interest rates are usually set in advance for the ±rst three years, and increase each year. After three years, they °uctuate with market conditions.

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