CHP5: C&B Bank pays interest of 5% compounded annually. B&K Bank pays 5 percent simple interest. What’s true if u invest $1,000 in each bank for 6 years? C&B Bank: $1,000(1.05)6 - $1,000 = $340.10 compound interest B&K Bank: $1,000(.05)(6) = $300.00 simple interest Interest on interest paid by C&B Bank = $340.10 - $300.00 = $40.10 Millie wants to have $15,000 in her investment account 8 years from now. How much does she have to deposit today to achieve her goal if she can earn 9 percent compounded annually? PV = $15,000[1/(1.09)8] = $7,527.99 Enter N= 8 i/y= 9 FV= 15,000 Solve for PV= -7,527.99. Your grandfather deposited $750 into an account for you nine years ago. Today, the account is worth $1,055.53. If interest is compounded annually, what rate of return have you been earning on this money?Enter N=9 PV= 750 FV= 1,055.53 Solve for i/y = 3.86995 Manual check: $750(1.0386995)9 = $1055.53Answer is 3.87% (rounded) u opened a savings account 5years ago and deposited $500. The following year, u add $400 to the account. U didn’t add any more money until today when you deposited an additional $100 into the account. The rate of return is 3%compounded annually. How much is in the account after your latest deposit? FV = $500(1.03)5 + $400(1.03)4 + $100(1.03)0 = $579.64 + $450.20 + $100.00 = $1,129.84 Enter N 5 i/y 3 pv 500 Solve for FV 579.64 Enter N 4 i/y= 3 PV= 400 Solve for FV= 450.20 Enter n 0 iy 3 pv 100 Solve for fv 100.00 Total FV = $579.64 + $450.20 + $100.00 = $1,129.84 All else equal, the future value will decrease as the rate of return decreases. All else equal, the present value will increase as the period of time decreases. Chp6: u can afford car payments of $145 a month for 4 years. The interest rate is 5.9%, compounded monthly. How much can you afford to borrow to buy a car? Enter n = 412 i/y= 5.9/12 pmt= -145 Solve for pv= 6,186.22 You are going to receive $5,000 at the beginning of each quarter for the next four years. What is the net present value of these payments at a discount rate of 8 percent, compounded quarterly? Enter N=44 I/Y = 8/4 pmt= 5,000BGN Solve for pv= -69,246.32 A preferred stock pays annual dividends of $5.50. How much are you willing to pay today to buy one share of this stock if you want toearn a 12 percent rate of return? ; PV = $45. What is the effective annual rate of 12.9 (APR) percent compounded continuously? Input is .129, 2nd, ex, -1,=; EAR = 13.77 percent . You pay the asked price when you buy a Treasury bond. Which one of the following bonds has the least interest rate risk?a. 5-year; 6 percent coupon b. 5-year; zero coupon c. 10-year; zero coupon d. 10-year; 6 percent coupon a The shortest term, highest coupon bond is the least sensitive to interest rate changes What is the tax-equivalent yield of a 3.5 percent municipal bond if the bondholder is in the 28 percent federal tax bracket? Ignore state and local taxes. TEY = .035 (1 - .28) = .0486 = 4.86 percent Jenny earned 9.2 percent on her investments last year. What was her real rate of return if the inflation rate was 2.6 percent? r = [(1 + .092) (1 + .026)] - 1 = .0643 = 6.43 percent ‘ Kiddy and Kat, Inc. has 6 percent semi-annual bonds outstanding with 11 years to maturity. The latest