MINDTAP Ch 05: Assignment-Time Value of Money Keep the Sighest3 3. Simple versus
ID: 2810641 • Letter: M
Question
MINDTAP Ch 05: Assignment-Time Value of Money Keep the Sighest3 3. Simple versus compound interest Aa Financial contracts involving Investments, mortgages, loans, and so on are based on either a fixed or a varable rate. Asunt that rates used ms question. ddison plans to loam $1,700 to her friend, who will pay a simple ese rand82% every year for the loan, y no pey-s m $4,04528 . 51233.40 made and mo further borowing occurs between the for 11 money will Addson's friend owe her $1,85083 then how much wl O $239.40 Now, assurne that Addison's friend volunteers to pay compound $4,045.28 acerved at 8.2% co ded annualy. al other thi gs being equal, how much nowy Addor 's friend o $1,839 40 O $331-71 $3,233 40 quartery. Keeping everything else constant, how much money wi Addean have in 11 years if she invests $1,700 $1,843.75 $4,151 66 1239 40 $36835Explanation / Answer
Principal (P) - $1700
Interest (R) - 8.2%
Time (T) - 11 Years
1) Simple Interest (SI) = PNT
SI = 1700*8.2*11/100
= 1533.4
Amount ($) = P + SI
= 1700 + 1533.4
= 3233.40
Addison's friend will owe her $3233.4 after 11 years.
2) Compund Interest (CI) = P(1 + R/N)^(NT) - P
N = Number of times interest compunded = 1
Compounded anually
CI = 1700 * (1 + 8.2%/1) ^ (1 * 11) - 1700
= 1700 * (1 + 0.082/1) ^ (11) - 1700
= 1700 * (1.082/1) ^ 11 - 1700
= 1700 * 1.082 ^ 11 - 1700
= 1700 * 2.38 - 1700
= 4046 - 1700
= 2346
Amount ($) = P + CI
= 1700 + 2346
= 4046
Addison's friend will owe her $4046 after 11 years.
3) Compounded quaterly (N) = 4
CI = 1700 * (1 + 8.2%/4) ^ (4 * 11) - 1700
= 1700 * (1 + 0.082/4) ^ (44) - 1700
= 1700 * (4.082/4) ^ 44 - 1700
= 1700 * 1.020 ^ 44 - 1700
= 1700 * 2.442 - 1700
= 4151.4 - 1700
= 2451.4
Amount ($) = P + CI
= 1700 + 2451.4
= 4151.4
Addison will have $4151.4 after 11 years.
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