Section 5.7 Financial Models

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Section 5.7 Financial Models Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

A credit union pays interest of 4% per annum compounded quarterly on a certain savings plan. If $2000 is deposited in such a plan and the interest is left to accumulate, how much is in the account after 1 year? Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Find the amount A that results from investing a principal P of $2000 at an annual rate r of 8% compounded continuously for a time t of 1 year. Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Suppose that you have $1000 and a bank offers to pay you 3% annual interest on a savings account with interest compounded monthly. In one year: The effective rate of interest is the equivalent annual simple rate of interest that would yield the same amount as compounding after 1 year. Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Suppose you want to open a money market account Suppose you want to open a money market account. You visit three banks to determine their money market rates. Bank A offers you 4% annual interest compounded daily, Bank B offers you 4.1% compounded monthly, and Bank C offers 3.95% compounded continuously. Determine which bank is offering the best deal. Bank A Bank B Bank C Bank B is offering the best deal Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

7% compounded monthly? (b) 6% compounded continuously? Copyright © 2013 Pearson Education, Inc. All rights reserved

Copyright © 2013 Pearson Education, Inc. All rights reserved

What annual rate of interest compounded quarterly should you seek if you want to double your investment in 6 years? The annual rate of interest needed to double the principal in 6 years is 11.71% Copyright © 2013 Pearson Education, Inc. All rights reserved

How long will it take to triple at this rate? How long will it take for an investment to double in value if it earns 6% compounded continuously? How long will it take to triple at this rate? Copyright © 2013 Pearson Education, Inc. All rights reserved