SIMPLE INTEREST

FORMULA

1. Richard deposits $ 5400 and got back an amount of $ 6000 after a year. Find the simple interest he got.

Solution:

Principal (P) = $ 5400,

Amount (A) = $ 6000

Simple Interest (SI) = Amount (A) – Principal (P)

= 6000 - 5400

= 600

Therefore, Richard got an interest of $ 600.

2. Seth invested a certain amount of money and got back an amount of $ 8400. If the bank paid an interest of $ 700, find
the amount Sam invested.

Solution:

Amount (A) = $ 8400,

Simple Interest (SI) = $ 700

Principal (P) = Amount (A) – Interest (I)

= 8400 - 700

= 7700

Therefore, Seth invested $ 7700.

3. Diego deposited $ 10000 for 4 year at a rate of 6% p.a. Find the interest and amount Diego got.

Solution:

Principal (P) = $ 10000,

Time (T) = 4 years,

Rate (R) = 6% p.a.

Simple Interest (SI) = {Principal (P) × Rate (R) × Time (T)}/100

= (10000 x 6 x 4)/100

= $ 2400

Amount (A) = Principal (P) + Interest (I)

= 10000 + 2400

= $ 12400

The interest Diego got = $ 2400.

Therefore, the amount Diego got $ 12400.

COMPOUND INTEREST
FORMULA

1. If $3000 is placed in an account at 5% and is compounded quarterly for 5 years. How much is in the account at the end of 5 years?

Solution
Compounded n times a year and after t years, the total amount is given by: A = P(1 + r/n)n t
quarterly n = 4: Hence A = P(1 + r/4) 4 t = 3000(1 + 0.05/4) 4 × 5 = $3846.11

2.What interest rate, compounded annually, is needed for a principal of $4,000 to increase to $4,500 in 10 year?

Solution
P initial balance is equal to $4,000 and final balance is equal to $4,500.
A = P(1 + r) t = 4,500
4000(1 + r) 10 = 4,500
(1 + r) 10 = 4500 / 4000
Take ln of both sides.
10 ln(1 + r) = ln(4500 / 4000)
ln(1 + r) = ln(4500 / 4000) / 10
1 + r = e 0.1 ln(4500 / 4000)
r = e 0.1 ln(4500 / 4000) - 1 ≅ 0.012

3. A principal of $120 is deposited in a 7% account and compounded continuously. At the same time a principal of $150 is deposited in a 5%
account and compounded annually. How long does it take for the amounts in the two accounts to be equal?

Solution
Continuous compounding: A 1 = 120 e 0.07 t
Annual compounding: A 2 = 150 (1 + 0.05)t
A1=A2
120 e 0.07 t = 150 (1 + 0.05)t
Take log base e (ln) of both sides.
ln(120 e 0.07 t) = ln( 150 (1 + 0.05)t )
Use property ln(A B) = ln(A) + ln(B) to rewrite the above as:
ln(120) + ln(e 0.07 t) = ln(150) + ln ( (1 + 0.05)t )
Use properties ln A n = n ln(A), ln(e n) = n to simplify.
ln(120) + 0.07 t = ln(150) + t ln( 1+ 0.05)
Solve for t.
t (0.07 - ln( 1 + 0.05) ) = ln(150) - ln(120)
t = [ ln(150) - ln(120) ] / [ 0.07 - ln( 1 + 0.05) ] ≅ 10.5 years
Check graphically below. Graphs intersect when A 1 = A 2.
STOCKS AND BONDS
FORMULA

1. What is the retail price of a 5 year, $1,000 face value bond that with a coupon rate of 6.0000% with
semi-annual payments if its current yield to maturity is 8.0000%?
m = 2, T = 5; n =m x T = 10
1) Find coupon payment: CPN = FV(rCPN /m) = $1,000(0.06/2) = $30

2) Find VB : P/Y=1, N=10, I/Y=4, PMT=30, FV=1000; CPT,PV: VB = $918.89

OR
P/Y=2, N=10, I/Y=8, PMT=30, FV=1000; CPT,PV: VB = $918.89

2. A $1000 face value bond with a maturity of 3 years and a 7.0000% coupon rate paying annual
interest is currently selling for $1,012.83. What is the yield to maturity of this bond?
1) Find coupon payment: CPN = FV(rCPN /m) = $1,000(0.07/1) = $70

2) Find YTM: P/Y=1, N=3, PV=-1012.83, PMT=70, FV=1000; CPT,I/Y: YTM = 6.5154%

3. At the beginning of the year a $5,000 face value bond paying a coupon rate of 9.2500% APR with
quarterly payments and 18 years maturity had a YTM of 9.3500%. At the end of the year the bond
sold at par (excluding fees and transaction costs). What is the bond’s total yield for the year?

Total Yield = EAR(rCPN ) + Capital Gains Yield

1) Find EAR(rCPN ) = (1 + rCPN /m)m – 1= (1 + 0.0925/4)4 – 1 = 9.5758%

2) Find VB (@t = 0): m=4, T= 18: m = m x T = 72 CPN = $5,000(0.0925/4) = $115.625

P/Y=4, N=72, I/Y=9.35, PMT= 115.625, FV=5000; CPT,PV: VB0 = $4,956.655

3) Find Cap Gains Yld: (VB1 – VB0 )/VB0 = ($5,000 - $4,956.655)/ $4,956.655 = 0.008745 = 0.8745%

Total Yield = 9.5758% + 0.8745% = 10.4503%