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Answers For Workshop 2

This document contains worked solutions to investment and finance problems: 1) A share that pays a $0.50 dividend and increases in value from $10 to $10.50 over a year saw a 10% return. 2) $12,000 invested for 2.5 years at 6% then 7% compounded monthly grew to $14,076.11. 3) $3,000 invested for 3 years at a simple 7.5% interest rate earned $675 in interest. The document then provides examples of calculating future values and interest earned on various compound interest investments over different periods of time at different rates.

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Jeevika Basnet
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94 views2 pages

Answers For Workshop 2

This document contains worked solutions to investment and finance problems: 1) A share that pays a $0.50 dividend and increases in value from $10 to $10.50 over a year saw a 10% return. 2) $12,000 invested for 2.5 years at 6% then 7% compounded monthly grew to $14,076.11. 3) $3,000 invested for 3 years at a simple 7.5% interest rate earned $675 in interest. The document then provides examples of calculating future values and interest earned on various compound interest investments over different periods of time at different rates.

Uploaded by

Jeevika Basnet
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Answers for Workshop 2:

1. At the beginning of a financial year, the market value of a share is $10. If at the end
of the year the share gives a dividend of $0.50 and has a market value of $10.50, what
is the return on this asset over the year?

Pt 1  10, Pt  10.50, Ct  0.50


Pt  Pt 1  Ct 10.50  10  0.50
rt    0.1 or, (10%)
Pt 1 10

2. An amount of $12,000 is invested in a bank account for two and a half years. The
account pays interest of 6% per annum compounded monthly for the first 18 months,
then at 7% per annum compounded monthly for a year. How much is in the account
at the end of this time if no withdrawals are made?

This can be considered in two stages (although the stages can be combined), finding
FV 1 ,

the amount after the first 18 months, then


FV 2 , the amount after the next 12 months.

i1  0.06, i2  0.07, m  12
m n 18
 i   0.06 
FV1  PV  1  1   12, 000 1  
 m  12 
 12, 000(1.005)18  13,127.15
12
 0.07 
FV2  FV1  1    13,127.15(1.00583)  $14, 076.11
12

 12 

3. Find the interest earned over 3 years on an investment of $3,000 paying simple
interest of 7.5% per annum (p.a.).
Interest earned =PV ×i×t
=3 , 000×0 .075×3
=$ 675

4. For the following investments find the compound amount (future value) and total
interest earned. Assume no interest is withdrawn before the term of the investment is
reached.
(i) $10,000 over 6 years earning 5% p.a. compounded annually.

PV  10, 000 n6


i  effective rate per compounding period (year)  0.05
Compound amount  FVn  PV (1  i ) n
FV6  10, 000 (1  0.05)6  $13, 400.96
Interest earned  FV  PV  $3, 400.96

(ii) $6,000 over 4 years and 6 months earning 9% p.a. compounded quarterly.

1
PV  6, 000, n  4 12 , m  4, i  0.09
m n 18
 i   0.09 
FVn  PV 1    6, 000 1    $8,955.52
 m  4 
Interest earned  $8,955.52  $6000.00  $2,955.52

(iii) $5,000 over 2 years earning 10% p.a. compounded daily. (Assume 365 days per
year)
PV  5000, n  2, m  365, i  0.1
730
 0.1 
FV2  5, 000 1    $6,106.85
 365 
Interest earned  $6,106.85  $5000.00  $1,106.85

5. Find the present value of $8,000 due in 5 years’ time at 10% per annum compounded
monthly.
−( m×n) −(5×12)
i 0.1
PV =FV 1+ ( ) m (
=8, 000  1+
12 ) =$ 4 ,862 . 31

6. An amount of $6,000 is invested for a period of 6 years and earns interest at a rate of

12% per annum compounded monthly. What is the effective annual rate of interest

earned on the investment? Express your answer as a percentage rounded to 2 decimal

places.

m
i
( ) −1
EAR= 1+
m
12
0 . 12
¿ (1+
12 )
−1≈0 . 1268 (12. 68 %)

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