Davis Case

Topics: Compound interest, Future value, Money Pages: 3 (1082 words) Published: April 3, 2013
In part 1a we are buying a 1 year CD for 10,000 using 10 percent interest which would give us $11,000 future value. Then in 1b we bought CDs with 5 percent and 15 percent interest rates and got future values of $10,500 and $11,500, respectively. But in part 1c we decide to use First National Bank of San Francisco which is all the same except it is compounded semiannually which gives us an effective rate of 10.25% and as well as a future value of $11,025. In part 1d we would invest in Pacific Trust which offers the same rate but is compounded daily; we got an effective rate of 10.52% and a FV of $11,051.56. Finally in 1e we determined what First National Bank would need to offer semiannually to be competitive with the daily compounding CD of Pacific and we found a rate of 5.126% in order to get the same present value for First National Bank’s CD to be competitive. In part 2 we used the same percentages except now we used a 5 year CD instead of a 1 year CD. For 2a we used 10 percent at 5 years and PV of $10,000 to get a future value of $16,105.10 using the FV formula in excel. Then in 2b we changed the rates to 5% and 15% and got the Future values of $12,762.82 and $20,113.57 respectively using once again the FV formula. Then in 2c using the effective rate formula we used the 10% rate and 10 years due to 5 years compounded semiannually and got an effective rate of 10.46% and using the same 10 years and 5% due to it being compounded semiannually we got a future value of $16,288.95. Then is problem 2d we once again found the effective rate using that formula but we used the rate of 10% and 1825 years due to 5 years being compounded yearly giving us an effective rate of 10.52% and using the same 1825 years and .03% and the future value formula we got a FV of $16,486.08. Then in part 3 we are trying to figure how is the best way to be able bay the $20,000 college bill that will needed to be paid in 5 years. In 3a if we need $20,000 in 5 years at a...
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