Homework Solution Set #1

1)

LIP = LCP = 3 months; i r / c .08 / 4 .02 2%

(1.02) 4 1
P 1000[ 4
] 5000(1.02) 12 3807.73 3942.47 7750.20
.02(1.02)
2)

Set LIP = LCP: i n (1 r / c) c / cn 1 where c n =2 (semiannual i n )

i n (1 .08 / 4) 1 .0404
4/2

Future Value of $20k at time 1: F 20000(1 .0404)1 $20,808

P[i(1 i) n ] 20,808[. 0404(1.0404)10 ]

A $2570.55
(1 i) n 1 (1.0404)10 1
3)

Future Value of $2k at t=2 is 2000(1.0067) 2 $2026.89

1 (1 g ) n (1 i) n 1 (1.1)12 (1.0067) 12
P F1 [ ] ==> 2026.89 F1 [ ]= F1 $99.7
(i g ) (.0067 .1)

Size of 6 th payment F6 F1 (1 g)5 99.70(1.1)5 $160.57

4)

Set LIP = LCP:

i n (1 r / c) c / cn 1 where c n =12 (monthly)

i n (1 .04 / 4) 1 .003322
4 / 12

A[(1 i n ) n 1] 100[(1.003322)10 1]
Future Value @ t=10 is F10
in .003322

F10 $1015.08

Future Value @ t=12 is 1015.08(1.003322) 2 $1021.84

5)
 i eff (1 r / c) c 1 (1 .08 / 2) 2 1 .0816

Future Value of $5k @ t=1 is F1 5000(1.0816)1 5408

P[i(1 i) n ] 5408[. 0816(1.0816) 5 ]

$1360.19
(1 i) n 1 (1.0816) 5 1
6)a)

i n i eff (1 r / c) c 1 (1 .06 / 2) 2 1 .0609

Take $8k back 1 year: 8000(1.0609) 1 $7540.77

P[i(1 i) n ] 7540.77[. 0609(1.0609) 6 ]

A $1537.85
(1 i) n 1 (1.0609) 6 1

1537.85[(1.0609) 3 1]
b) Present Value (after third payment) 7540.77
.0609(1.0609) 3
$3436.9
Future Value @ t=4 3436.91(1.0609) 4 $4353.78
7)

Set LIP = LCP = 1 Month: i n (1 r / c) c / c n 1 (1 .06 / 4) 4 / 12 1

.00498
1.00498 1
Future Value @ t=60 100[ ] $6972.7
.00498