Quiz on Chapter 7 worked solutions
1. I = Prt so I = 2500*0.08*265/365=141.58
2. t=I/Pr, so t = 5.7/(360*0.12) then multiply by 365 to get days, round up to 49
3. This is a present value problem because you pay less NOW instead of more LATER. First find the number of days which is 182. Then use the PV formula so P=1850/(1+0.132*182/365) = 1735.75
4. Two PV problems. We know how much you would get in the future, want to find out how much it is worth NOW: P = 800/(1+0.065*3/12) + 9500/(1+0.065*5/12) = 787.21 + 9249.49 = 10036.7
5. Draw a timeline. Then find the days between each event and the focal date. Here:
1 Mar and focal: 213
30 April and focal: 153
20 June and focal: 102
10 Aug and focal: 51
Now we want an ‘equation of equivalence’. Call each event ‘E’.
Borrow 1600 is E1
Pay back on 30 April is E2
Pay back on 20 June is E3
Pay back on 10 Aug is E4
What you borrowed has to exactly equal the three payments and the 500 final payment on the focal date.
So E1 = E2 + E3 + E4 + 500
Get the future value of each E
1600(1+0.07*213/365) = (1+0.07*153/365)X + (1+0.07*102/365)X + (1+0.07*51/365)X + 500
which works out to
1665.36 = 1.03X + 1.02X + 1.01X + 500. Take 500 from both sides
1165.36 = 3.06X. Divide through both sides by 3.06 to find X = 380.84
You make three equal payments of 380.84 and a final payment of 500
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