Question #1
  Jamie wants to earn $500 in interest so she’ll have enough to buy a used car. She puts $2000 into an account that earns interest. How long will she need to leave her money in the account to earn $500 in interest?   
Question #2
  A local bank is advertising that you can double your money in eight years if you invest with them. Suppose you have $1000 to invest. What interest rate is the bank offering?


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Question #1
  Kelly plans to put her graduation money into an account and leave it there for 4 years while she goes to college. She receives $750 in graduation money that she puts it into an account that earns 4.25% interest. How much will be in Kelly’s account at the end of four years?  A. $127.50
 B. $754.0425
 C. $877.50
 D. $1275
    
Question #2
  Randy wants to move his savings account to a new bank that pays a better interest rate of 3.5% so that he can earn $100 in interest faster than at his old bank. If he moves $800 to the new bank, how long will it take for him to earn the $100 in interest?  A. 3.57 years
 B. 0.357 years
 C. 0.28 years

A father left a will of Rs.35 lakhs between his two daughters aged 8.5 and 16 such that they may get equal amounts when each of them reach the age of 21 years. The original amount of Rs.35 lakhs has been instructed to be invested at 10% p.a. simple interest. How much did the elder daughter get at the time of the will? (1) Rs. 17.5 lakhs  (2) Rs. 21 lakhs  (3) Rs. 15 lakhs  (4) Rs. 20 lakhs Correct Answer  (2)
Solution:
Let Rs.x be the amount that the elder daughter got at the time of the will. Therefore, the younger daughter got (3,500,000  x).
The elder daughter’s money earns interest for (21  16) = 5 years @ 10% p.a simple interest The younger daughter’s money earns interest for (21  8.5) = 12.5 years @...
...COMPOUND INTEREST
Making or Spending Money
SIMPLEINTEREST FORMULA
If a principal of P dollars is borrowed for a
period of t years at a per annum interest rate
r, expressed as a decimal, then interest I
charged is
I Pr t
This interest is not used very often. Interest is
usually compounded which means interest
is charged or given on the interest and the
principal.
SimpleInterest Example
COMPOUND INTEREST
Payment Periods:
Annually
Once per year
Semiannually
Twice per year
Quarterly
Four times per year
Monthly
Twelve times per year
Weekly
Fifty two times per year
Daily
365 (360 by banks) per year
COMPOUND INTEREST FORMULA
The amount A after t years due to a principal
P invested at an annual interest rate r
compounded n times per year is
r
A P 1
n
nt
A is commonly referred to as the
accumulated value or future value of the
account. P is called the present value.
COMPOUND INTEREST
Example:
Investing $1000 at an annual rate of 8%
compounded annually, quarterly, monthly,
and daily will yield the following amounts
after 1 year:
Annually
Quarterly
Monthly
Daily
COMPOUND INTEREST
Online example
More online examples
COMPOUND INTEREST
Tutorial
Continuous...
...Interest Rates and Bond Valuation
Chapter 6 6.2 More on Bond Features
Securities issued by corporations are classified as equity securities and debt securities. A debt in very simple terms represents something that must be paid as a result of borrowing money, when corporations borrow money they make regular interest payments as well as paying the principal amount at the end of the period. There are three main differences between debt and equity, which are: Debt is not ownership; creditors don't have any say in the firm's decisions. Interest is taxable, but dividends are not tax deductible. Unpaid debt is a liability on the firm; if the firm goes bankrupt creditors can legally claim assets of the firm. Debt can result to financial failure, but this is not the case when equity is issued. Is it Debt or Equity? Sometimes it is unclear if what the firm is offering is a debt or equity security. The main purpose behind doing this is so that firms offer debts that are actually equity securities so that they can obtain tax benefits from debts and the bankruptcy benefits of equity. Debt holders are usually paid before equity holders. The rewards for owning a debt is fixed according to the loan's amount, but there is no limit to the available rewards that can be gained from owning equity, the higher the profit the bigger the interest amount. Longterm Debt: The Basics Even...
...Understanding the Term Structure of Interest Rates
Prepared for Fundamentals of Financial Management
Distributed
October 24, 2005
TABLE OF CONTENTS
List of Figures....................... ....................................... .....................iii
List of Abbreviations and Symbols............................. ..........................iv
Summary............................................................................. ...................5
Introduction.......................................... .................................................7
Understanding the Term Structure of Interest Rates ............. ...............8
Term Structure Puzzle................................................................8
The Yield Curve .8
The Expectations Theory 9
Visual Aids..............................................................................10
Conclusions ......... .............................. .............11
LIST OF FIGURES
Figure 1: Expected Yield Curve When Inflation Is Expected to Increase ..4
Figure 2: Expected Yield Curve When Inflation Is Expected to...
...until retirement to meet your
objectives? Assume interest remains at 9%. [Rs.1254]
2. You can deposit Rs.4000 per year into an account that pays 12% interest. If you
deposit such amounts for 15 years and start drawing money out of the account in
equal annual installments, how much could you draw out each year for 20 years?
[Rs.19964.12]
3. What is the value of a Rs.100 perpetuity if interest is 7%? [Rs.1428.57]
4. You deposit Rs.13,000 at the beginning of every year for 10 years. If interest is
being paid at 8%, how much will you have in 10 years? [Rs.203391.33]
5. You are getting payments of Rs.8000 at the beginning of every year and they are
to last another five years. At 6%, what is the value of this annuity? [35720.84]
6. How much would you have to deposit today to have Rs.10,000 in five years at
6% interest compounded semiannually? [Rs.7440.94]
7. Construct an amortization schedule for a 3year loan of Rs.20,000 if interest is
9%.
8. If you get payments of Rs.15,000 per year for the next ten years and interest is
4%, how much would that stream of income be worth in present value terms?
[Rs.121663.50]
9. Your company must deposit equal annual beginning of year payments into a
sinking fund for an obligation of Rs.800,000 which matures in 15 years. Assuming
you can earn 4% interest on the sinking fund, how much must the payments be?...
...wins? If not, who loses?
Introduction:
Players: Morgan Bank, Rabobank, and B.F. Goodrich, Salomon Brothers, Thrift Institutions and Saving Banks
Goodrich:
In early 1983, Goodrich needed $50 million to fund its ongoing financial needs. However, Goodrich was reluctant to borrow (short term debt) from its committed bank lines because of the following reasons:
1. It would lose substantial about of its remaining short term capital availability under its bank lines.
2. It would compromise its future flexibility by borrowing in the short term.
Instead, it wanted to borrow for an 8 year range (or longer) at a fixed rate.
However, since the general level of interest rates were pretty high, and Goodrich’s credit ratings had dropped from BBB to BBB. Goodrich believed that it would have to pay 13% interest for a 30 year corporate debenture.
Salomon Brothers had advised Goodrich that they could borrow in the US public debt market with a floating rate debt issue tied to the LIBOR, and then swap payments with Euro market bank that had raised funds in the fixedrate Eurobond market.
Note: The reason that Salomon were confident that this could be done is described as follows:
1. There was a recent deregulation of deposit markets had allowed deposit institutions to offer new variable rate money market deposit accounts.
2. As result of these new offerings large thrift institutions
Rabobank:
Rabobank had AAA debt ratings, and...
...and Structure of Interest rates
P C Narayan
IIMB PCN BFMS L02
1
Loanable Funds theory
“Market interest Rate is
determined by the factors
that control the supply and
demand for loanable funds”
IIMB PCN BFMS L02
2
1
Demand for Loanable Funds
• Household demand for loanable funds
– As household income rises, so does installment debt
– Inverse relationship between demand for lonable funds
and interest rate
• Business demand for loanable funds
– Inverse relationship between demand for lonable funds
and interest rate
• Government demand for loanable funds
– Interest inelastic since borrowing to meet deficit
• Foreign demand for loanable funds
– Country A issues securities to investors of country B
• Total Demand for lonable funds Da =
Dh + Db + Dg + Df
IIMB PCN BFMS L02
3
Supply of Loanable Funds
• Household sector is the largest followed by
Government and Business (Sa)
• Directly proportional to interest rates
_______________________________________
In equilibrium, Da = Sa
• And the interest rate at this point is is known as
‘equilibrium interest rate’
• Change in demand or supply causes a change in
‘equilibrium interest rate’
IIMB PCN BFMS L02
4
2
Fisher Effect
• Offers an additional explanation to the loanable
funds theory
• Nominal Interest rate
– Compensates for reduced purchasing power
– Provides a premium for...
...Difference Between SimpleInterest and Compound Interest
We will be going into the difference between simpleinterest and compound interest. The results can be astounding when comparing the two results of any kind of example when comparing the two. To understand your finances and how your money works this will be a very integral part of knowledge.
The first and most important difference between these two types of interest is that in compound interest you begin to earn interest on the interest that you earned in the prior period. In simpleinterest this is not the case. In simpleinterest, which is used primarily in loans and short term periods, the principal is the only amount the interest is calculated from. In other words, you are going to accumulate a lot more interest when the interest is calculated by using compound interest.
When dealing with compound interest the interest is calculated on a daily, monthly, quarterly, semiannually, or annually. The formula that is used to calculate this interest on a bond for example would be Interest= Principal x Rate x Time (number of periods). By looking at this formula you can tell how the number of periods is going to...
...
In this document of ECO 316 Week 2 Chapter 7 Risk Structure and Term Structure of Interest Rates you will find the answers on the next questions:
7.1 Multiple Choice Questions
1) The risk structure of interest rates refers to
2) Default risk arises from the fact that
3) If the average risk premium of corporate bonds increases,
4) Currently, a threemonth Treasury bill pays 5% interest and a tenyear Treasury bond pays 4.7% interest. What is the risk premium of the typical Arated corporate bond that pays 5.5% interest?
5) Currently, a threeyear Treasury note pays 4.75%. Assuming that your tax rate is 20%, what is the minimum interest rate that you would you need to earn on a taxfree municipal bond in order to buy it instead?
6) When a company whose ability to repay its obligations in full is uncertain borrows funds
7) Default risk
8) Which of the following is considered a defaultriskfree instrument?
9) U.S. Treasury securities
10) The default risk premium is measured
11) The default risk premium is
12) The default risk premium
13) Riskneutral savers care
14) Savers generally are
15) Because savers are generally riskaverse
16) Savers who are riskaverse
17) Investors often pay professional analysts to gather and monitor information on the creditworthiness of borrowers because
18) Which of the...