The four situations are described here. I) Manhattan Island was purchased in 1626 for $24. After 385 years in 2011, at 6% per year compounded interest, the current value must be very large. 2) At the age of 22, if she saved only $2000 per year for the next 10 years (starting next year) and made a retum of 6% per year, by today's standards, she would have accumulated a nice sum at the age of 70. 3) A corporation invested $2 million in developing and marketing a new product in 1945 (just after World War II, this was a lot of money) and has made a steady net cash flow of $300,000 per year for some 65 years. Sundara estimated the annual rate of return must be quite good, especially given that she is lucky to carn 4% per year on her own investments these days 4) A friend, who is not good with money, went to a pawn shop and borrowed $200 for one week and paid $30 in interest. Sundara thought this might be a pretty good deal, in case she ever ran low on cash. However, she did not know whether the interest was simple or compounded monthly, and how much may be owed were this loan not paid off for I year. Questions a) What is the annual interest rate for cach situation? Include both the annual simple and the compound rates for situation 4). b) Calculate and observe the total amount of money involved in each situation at the end of the time periods compared to the starting amount. Is the ending amount larger or smaller than you would expect it to be prior to making any computations? e) Think of a situation for yourself that may be similar to any of those above. Determine the interest rate, the time period, and the starting and ending amounts of money
The four situations are described here. I) Manhattan Island was purchased in 1626 for $24. After 385 years in 2011, at 6% per year compounded interest, the current value must be very large. 2) At the age of 22, if she saved only $2000 per year for the next 10 years (starting next year) and made a retum of 6% per year, by today's standards, she would have accumulated a nice sum at the age of 70. 3) A corporation invested $2 million in developing and marketing a new product in 1945 (just after World War II, this was a lot of money) and has made a steady net cash flow of $300,000 per year for some 65 years. Sundara estimated the annual rate of return must be quite good, especially given that she is lucky to carn 4% per year on her own investments these days 4) A friend, who is not good with money, went to a pawn shop and borrowed $200 for one week and paid $30 in interest. Sundara thought this might be a pretty good deal, in case she ever ran low on cash. However, she did not know whether the interest was simple or compounded monthly, and how much may be owed were this loan not paid off for I year. Questions a) What is the annual interest rate for cach situation? Include both the annual simple and the compound rates for situation 4). b) Calculate and observe the total amount of money involved in each situation at the end of the time periods compared to the starting amount. Is the ending amount larger or smaller than you would expect it to be prior to making any computations? e) Think of a situation for yourself that may be similar to any of those above. Determine the interest rate, the time period, and the starting and ending amounts of money
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please solve part B in question section
Transcribed Image Text:The four situations are described here.
1) Manhattan Island was purchased in 1626 for $24. After 385 years in 2011, at 6% per year compounded interest, the
current value must be very large.
2) At the age of 22, if she saved only $2000 per year for the next 10 years (starting next year) and made a retum of 6% per
year, by today's standards, she would have accumulated a nice sum at the age of 70.
3) A corporation invested $2 million in developing and marketing a new product in 1945 (just after World War II, this was a
lot of money) and has made a steady net cash flow of $300,000 per year for some 65 years. Sundara estimated the annual
rate of retum must be quite good, especially given that she is lucky to earn 4% per year on her own investments these
days.
4) A friend, who is not good with money, went to a pawn shop and borrowed $200 for one week and paid $30 in interest.
Sundara thought this might be a pretty good deal, in case she ever ran low on cash. However, she did not know whether
the interest was simple or compounded monthly, and how much may be owed were this loan not paid off for I year.
Questions
a) What is the annual interest rate for each situation? Include both the annual simple and the compound rates for situation
4).
b) Calculate and observe the total amount of money involved in each situation at the end of the time periods compared to
the starting amount. Is the ending amount larger or smaller than you would expect it to be prior to making any
computations?
e) Think of a situation for yourself that may be similar to any of those above. Determine the interest rate, the time period,
and the starting and ending amounts of money.
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