Financial contracts involving investments, mortgages, loans, and so on are based

Question

Financial contracts involving investments, mortgages, loans, and so on are based on either a fixed or a variable interest rate. Assume that fixed interest rates are used throughout this question. Addison plans to loan $1,300 to her friend, who will pay a simpleO $2,390.00 interest rate of 7% every year for the loan. If no payments are $ 191.00 made and no further borrowing occurs between them for nine years, then how much money will Addison's friend owe her? O $2,119.00 O $1,397.37 Now, assume that Addison's friend volunteers to pay compound interest instead of simple interest for her loan. If interest is accrued at 7% compounded annually, all other things being equal, how much money will Addison's friend owe her in nine years? $167.30 O $2,390.00 O $2,119.00 $1,391.00 Addison has another investment option in the market that pays 7% nominal interest, but it's compounded quarterly. Keeping everything else constant, how much money will Addison have in nine years if she invests $1,300 in this fund? $191.00 O $181.83 O $1,393.42 O $2,427.63

Explanation / Answer

Dear Stdent Thank you for using Chegg !! Given Principal Amount (P ) = 1300 $ Rate of Interest (Simple) = 7% p.a. Time period = 9 years Simple Interest = P * R + T / 100 = 1300 * 0.07 * 9 = 819 $ Hence Amount = Principal + Interest i.e. 1300 + 819 = 2119 $ (Option C) Now since no interest was paid for these 9 years, hence at the end of 9 years cumulative interest shall have to be paid which converts this Simple interest problem to a compound interest problem. where Amount (After 9 years) = P ( 1 + r / 100 )^t = 1300 ( 1 + 0.07)^9 = 2389.997 $ Hence 2390$ approx needs to be paid back Option B Now if Addison invests in investment scheme compounded quarterly then Amount = P (1 + r / 400)^4t = 1300* (1 + 0.07/4)^36 = 2427.629 $ i.e. 2427 . 63 $ Option D Solution

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