YOUR SOLUTION + A COPY OF REVISION PAPER - 91889

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 Suppose you deposits £ 10,000 in a bank account that pays 10 percent interest annually. How much money will be in his account after 5 years?

 

Solution

,           Present value (P) = £ 10,000,

            Interest rate (k) = 10%

            Number of years (n) = 5 years,

            Future value (FV5) = ?

 

 

 

 

We have,

            FV5 = PV × (1 + k)n     = £ 10,000 × (1.10)5

                                = £ 10,000 × 1.6105

                        = £ 16,105.10

 

What is the present value of a security that promises to pay you £ 5,000 in 20 years? Assume that you can earn 7 percent if you were to invest in other securities of equal risk?

Solution

Here,   Future value (FV) = £ 5,000

            Number of years (n) = 20 years

            Interest rate (k) = 7%

            Present value (PV) = ?

 

 

 

 

 

We have,

            PV  = = 5000/ (1.07)20

                   =5000/3.8697 = £ 1,292.09

 

 

Your parents are planning to retire in 18 years. They currently have £ 250,000, and they would like to have £ 1,000,000 when they retire. What annual rate of interest would they have to earn on their £ 250,000 in order to reach their goal, assuming they save no more money?

Solution

Here,   Future value (FV) = £ 1,000,000

            Present value (PV) = £ 250,000

            Time period (n) = 18 years

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