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Compound Interest - Assignment Example

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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…
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Compound Interest
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Download file to see previous pages 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)
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)
3. 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?
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 ...Download file to see next pagesRead More
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