Business Math Essay

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Chapter 5 Interest Rates 5-1. Your bank is offering you an account that will pay 20% interest in total for a two-year deposit. Determine the equivalent discount rate for a period length of a. Six months. b. One year. c. One month. a. Since 6 months is [pic] of 2 years, using our rule [pic] So the equivalent 6 month rate is 4.66%. b. Since one year is half of 2 years [pic] So the equivalent 1 year rate is 9.54%. c. Since one month is [pic] of 2 years, using our rule [pic] So the equivalent 1 month rate is 0.763%. 5-2. Which do you prefer: a bank account that pays 5% per year (EAR) for three years or a. An account that pays 2[pic]…show more content…
Now that you realize your best investment is to prepay your student loan, you decide to prepay as much as you can each month. Looking at your budget, you can afford to pay an extra $250 per month in addition to your required monthly payments of $500, or $750 in total each month. How long will it take you to pay off the loan? The timeline in this case is: and we want to determine the number of monthly payments N that we will need to make. That is, we need to determine what length annuity with a monthly payment of $750 has the same present value as the loan balance, using the loan interest rate as the discount rate. As we did in Chapter 4, we set the outstanding balance equal to the present value of the loan payments and solve for N. [pic] We can also use the annuity spreadsheet to solve for N. |N |I |PV |PMT |FV | |30.02 |0.75 % |20,092.39 |–750 |0 | So, by prepaying the loan, we will pay off the loan in about 30 months or 2 ½ years, rather than the four years originally scheduled. Because N of 30.02 is larger than 30, we could either increase the 30th payment by a small amount or make a very small 31st payment. We can use the annuity spreadsheet to determine the remaining balance after 30 payments. |N |I

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