• October 2nd, 2017

Assignment for industrial economics

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0. A typical bank offers you a Visa credit card that charges interest on unpaid balance at 1.75%per month compounded monthly. This means that the nominal interest (annual percentage) rate for this account is A and the effective annual interest rate is B. Suppose your beginning balance was $600 and you make only the required minimum monthly payment (payable at the end of each month) of $20 for the next 3 months. If you made no new purchases with this card during this period, your unpaid balance (after your 3rd payment) will be C at the end of 3 months. What are the values of A, B, and C?

1. In January 1989, C&S, the largest mutual saving bank in Georgia, published the following information: interest, 7.55%; effective annual yield, 7.842%. The bank did not explain how the 7.55% is connected to the 7.842%, but you can figure out that the compounding scheme used by the bank should be ________.

2. How many years will it take an investment to double if the interest rate is 12% compounded (a) annually, (b) semiannually, (c) quarterly, (d) monthly, (e) weekly, (f) daily, and (g) continuously?


3. Suppose that $1,000 is placed in a bank account at the end of each quarter over the next 10 years. Determine the total accumulated value (future worth) at the end of 10 years where the interest rate is 8% compounded quarterly.

4. What equal payment series is required to repay the following present amounts?
a. $10,000 in 4 years at 10% interest compounded annually with 4 annual payments.
b. $5,000 in 3 years at 12% interest compounded semiannually with 6 semiannual payments.
c. $6000 in 5 years at 8% interest compounded quarterly with 20 quarterly payments.
d. $80,000 in 30 years at 9% interest compounded monthly with 360 monthly payments.

5. Suppose that $5,000 is placed in a bank account at the end of each quarter over the next 10 years. Determine the total accumulated value (future worth) at the end of 10 years when the interest rate is:
a. 12% compounded annually.
b. 12% compounded quarterly.
c. 12% compounded monthly.
d. 12% compounded continuously.

6. What equal quarterly payments will be required to repay a loan of $10,000 over 3 years if the rate of interest is 12% compounded continuously?

7. The following equation describes the conversion of a cash flow into an equivalent equal payment series with n=8. Draw the original cash flow diagram. Assume an interest rate of 10% compounded annually.

A = [-1,000 – 1,000(P/F, 10%, 1 )](A/P, 10%, 8)
+ [3,000 + 500(A/G, 10%, 4)](P/A, 10%, 4)(P/F, 10%, 1)(A/P, 10%, 8) + 750(F/A, 10%, 2)(A/F, 10%, 8)

8. For computing the equivalent equal-payment series (A) of the following cash flow with i = 10%, which of the following statements is (are) correct?

a. A = 100(P/A, 10%, 4)(A/P, 10%, 8)
b. A = [100(P/F, 10%, 2) + 100(P/F, 10%, 4) + 100(P/F, 10%, 6) + 100(P/F, 10%,
8)](A/P, 10%, 8)
c. A = 100(A/F, 10%, 2)
d. A = 100(P/A, 21%, 4)(A/P, 10%, 8)
e. A = 100(F/A, 10%, 4)(A/F, 10%, 8)
f. A = 100(F/A, 21%, 4)(A/F, 10%, 8)


9. Suppose you have the choice of investing in (a) zero-coupon bond that costs $513.60 today, pays nothing during its life, and then pays $1,000 after 5 years or (b) a municipal bond that costs $1,000 today, pays $67 in interest semiannually, and matures at the end of 5 years. Which bond would provide the higher yield to maturity (or return on your investment)?

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