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...
...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...
...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...
...Financial Markets
and Systems
Set  2
Theory 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...
...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...
...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...
...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...
...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...
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