Compound Interest - Assignment Example

Topic: Compound Interest Compound Interest - Instructor Graded ProjectYou must show your work on all problems. You may type your answer right into this document.Total points for project: 45 points. Part I. Basic Computations1. A.) Find the future value on $6,000 in three years if the interest is compounded semiannually at 12%. (5 points)FV = PV (1 + r)^tFV is the future value,PV is the present value,r is the rate ,^ is to the power of and t is the time.6000(1+0.06)^6=8511.11$FV=8511.11$Answer: 8511.11$B.) What is the compound interest earned?

(5 points)Compound interest=FV-PV8511.11-6000=2511.11$Answer: 2511.11$2. You have $12,000 that you plan to invest in a compound-interest bearing interest. Your investment agent advises you that you can invest the $12,000 at 8% compounded quarterly for three years or you can invest it at 8 ¼ % compounded annually for three years. Which investment should you choose to receive the most interest? Show your work for calculating the interest for both options. (10 points) FV = PV (1 + r)^tFV is the future value,PV is the present value,r is the rate ,^ is to the power of and t is the time.Sum A.12000(1+0.02)^12=15218.90$Sum B.12000(1+0.0825)^3=15221.

76$Answer: Invest in the one compounded annually for three years since the sum is higher the one invested quarterly.Part II. Case Study Willie owns and manages a number of real-estate rental properties in town and enjoys being his own boss. At 46 years old, Willie figures he would like to retire after working for 10 more years, so he is starting to think about investing for the future. His latest investments have been successful – after selling a four-unit apartment building and a town house, Willie has $300,000 in the bank and is debt-free.

With only 10 years before retirement, Willie wants to make solid financial decisions that will limit his risk exposure. An attractive property has come on the market this week – a pair of townhouses with a great view. The rental units are in good condition and would need only some minor repairs in order to get them into shape for rental. They are in a good location for vacationers and summer rentals. The price tag for the two townhouses totals $225,000 – well within his range. He figures he can invest the remaining $75,000, and between the two hopes to have $600,000 on which to retire by age 56. 1. Willie knows that real estate in this general location appreciates by about 5% a year.

Assuming that this trend continues, what will be the future value of the $225,000 townhouses in 10 years? (5 points) I=PV*r*t225000*0.05*10=112500$FV=PV+I225000+112500=337500$Answer: 337500$2. Willie’s local bank offers a 2-year certificate of deposit (CD) that pays 5% compounded quarterly. A competing bank in town also offers a 2 year CD that pays 5%, but the interest is componded daily. If Willie invests the $75,000, how much more money will he get from the second bank after two years due to the daily compounding (assume exact time is used)?

(5 points)FV = PV (1 + r)^t75000(1+0.0125)^8=82836.46$FV = PV (1 + r)^t75000(1+0.05/365)^730=82887.25Difference82887.25-82836.46=50.79Answer: 50.793. After purchasing the townhouses, Willie receives an assessment from the town for $17,500 due in 2 years to pay for road repairs and new sewer hookups for the properties. How much would he need to invest today in a CD paying 5%, compounded semiannually, to fully pay the assessment in 2 years? (5 points) FV = PV (1 + r)^t 17500(1+0.05/2)Answer: 20294.63 4. A friend of Willie’s is a real estate developer and needs to borrow $75,000 to finish a development project.

He is desparate for cash and offers Willie 18%, compounded monthly for 2 ½ years. Given that he can invest the money at a sure 5% with the bank, does this loan meet with Willie’s goals for low risk investment. Research some of the risks associated with this type of loan. Can you think of any ways to reduce the risk? (10 points) 5. Answer: If Willie lends money to his friend, he will make a sizeable amount as compared to investing the cash with the bank. The greatest risks that lie here for Willie is the risk to lose his investment money.

If he loses the money, he will end up not having any money to invest on in the future. If Willie invests with the bank, that will be a low investment scheme that would buy him time to make sane decision ( Bhidé ,2003). With this in mind, the risk involved can be reduced. Willie should invest for a long time so as to reduce or smooth out volatility. He should also be diversified since that spreads the risks that might be incurred. Some legal advice from a well informed person or expert is priceless.

With a few tips from one of these experts, Willie will be able to know what to invest in the future and decisions to make ( Bhidé ,2003). Reference.Bhidé, A. V. (2003). The origin and evolution of new business. New York: Oxford University Press.