Simple Interest. Bill bought a $10,000, 5 year certificate of deposit (CD) that

Question

Simple Interest. Bill bought a $10,000, 5 year certificate of deposit (CD) that would earn 3% annual simple interest. Two years before the CD was due to mature, Bill needed his CD money, so a friend agreed to lend him money and receive the value of the CD when it matured. How much interest will the CD generate upon maturity? What will be the value of the CD (its future value) when it matures? If the agreement allowed the friend to earn an annual interest rate of 5% return on his loan to Bill, how much did Bill receive from his friend? How much would Bill have gotten if he had been able to simply cash in his CD in just 3 years, rather than having to wait 5 years to cash it in? a. b. C. d.

Explanation / Answer

1

Interest generated=10000*3%*5=1500

2

Value of CD in future=10000+1500=11500

3

Bill needed 11500 for 2 years

Friend asked 5% rate..so, P+P*5%*2=11500

hence, P=11500/1.1=10454.55

Hence, Bill would receive 10454.55 from his friend

4

In 3 years, CD would have bceome 10000+10000*3%*2=10600

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