Week 2 Homework

Week 2 Homework

Chapter 3: Problem 3-1, 3-2

P3-1. If you have $1,500 to invest today at 7% interest compounded annually.
a. How much will you have accumulated in the account at the end of the following number of years?
1. 3 years -$1,500 PV 3 N 7 I/P CPT FV=$1,837.56

2. 6 years -$1,500 PV 6 N 7 I/P CPT FV=$2,251.10

3. 9 years -$1,500 PV 9 N 7 I/P CPT FV=$2,757.69
4.
b. Use your findings in part (a) to calculate the amount of interest earned in
1. Year 1 =$105 in interest
2. Year 2 =$112.35
3. Year 3 =$120.21
-$1,500 PV -$1,500 PV -$1,500 PV 3 N 2 N 1 N 7 I/P 7 I/P 7 I/P
CPT CPT CPT
FV=$1,837.56 FV=$1,717.35 FV=$1,605.00

4. Year 4 = $128.63
5. Year 5 = $137.64
6. Year 6 =$147.27
-$1,500 PV -$1,500 PV -$1,500 PV 6 N 5 N 4 N 7 I/P 7 I/P 7 I/P
CPT CPT CPT
FV=$2,251.10 FV=$2,103.83 FV=$1,966.19

7. Year 7 = $157.57
8. Year 8 =$168.61
9. Year 9 =$180.41

-$1,500 PV -$1,500 PV -$1,500 PV 9 N 8 N 7 N 7 I/P 7 I/P 7 I/P
CPT CPT CPT
FV=$2,757.69 FV=$ 2,577.28 FV=$2,408.67

c. Compare and contrast your findings in part (b). Explain why the amount of interest earned increases in each succeeding three year period.
Interest increases with each succeeding year because of compound interest. Interest is accrued on both the initial principle and on the interest earned in previous periods.
P3-2. Dixon Shuttleworth has a large sum of money that he wants to invest to finance his retirement. He has been presented with three options. The first investment offers a 5% return for first five years, a 10% return for the next five years, and a 20% return thereafter. The second investment offers 10% for the first