Ivan Raphael San Jose

Mod3 HW Problem Solving

1. A friend of yours borrowed P5,000 at 5% interest provided that she pays you back the P5,000
plus interest after 4 years. How much should you receive from her?
= 5,000(1 + 0.05/1)^(1*4)
= 5,000(1 + 0.05)^4
= 5,000(1.05)^4
= 5,000(1.21550625)
≈ 6,077.53

Your friend should pay you back approximately P6,077.53 after 4 years.

2. You borrowed P1,500,000 from the bank and you agree to pay off the loan after 5 years from
now and during that period you paid 13% interest on the loan. How much interest did you pay
for the money that you borrowed?

= 1,500,000 x 0.13 x 5

= 1,950,000

You paid P1,950,000 in interest on the P1,500,000 loan over the course of 5 years.

3. Using the figures in no. 2, what would be the interest in pesos if the interest charge to you was
compounded yearly?

= 1,500,000(1 + 0.13/1)^(1*5)

= 1,500,000(1.13)^5

≈ 1,500,000(1.925414582)

≈ 2,888,121.87

After 5 years, with annual compounding of interest, you would have to pay approximately
P2,888,121.87 in total.

= 2,888,121.87 - 1,500,000

Interest ≈ 1,388,121.87

You would pay approximately P1,388,121.87 in interest if the interest is compounded annually over 5
years.

4. Now let’s assume you were enticed to invest P1,500,000 with 13% interest per annum. How
much will you receive in 5 years?
= 1,500,000(1 + 0.13/1)^(1*5)
= 1,500,000(1.13)^5
 ≈ 1,500,000(1.925414582)
≈ 2,888,121.87
After 5 years, your P1,500,000 investment at a 13% annual interest rate will grow to
approximately P2,888,121.87.

5. Compute the future value of P6,000 compounded annual for

a. 5 years at 5%
b. 5 years at 8%
c. 10 years at 5%
d. Why is the interest earned in letter “c” not twice the amount earned in letter “a”?

a. 5 years at 5%:
= 6,000(1 + 0.05/1)^(1*5)
= 6,000(1.05)^5
≈ 6,000(1.2762815625)
≈ 7,657.69

b. 5 years at 8%:
= 6,000(1 + 0.08/1)^(1*5)
= 6,000(1.08)^5
≈ 6,000(1.469363536)
≈ 8,816.18

c. 10 years at 5%:
= 6,000(1 + 0.05/1)^(1*10)
= 6,000(1.05)^10
≈ 6,000(1.6288946268)
≈ 9,773.37

d. The interest earned in letter "c" is not twice the amount earned in letter "a" because the interest
earned on an investment doesn't simply double when you double the time period. In letter "a," the
money is invested for 5 years at a 5% annual interest rate, and in letter "c," it is invested for 10 years at
the same 5% annual interest rate.

6. Let’s say your friend wish to have P3,000,000 saved by the end of six years. Suppose that he
deposited this money today in an account that pays 6% interest, compounded annually. How
much must your friend deposit today to meet her goal?
= 3,000,000 / (1 + 0.06/1)^(1*6)
= 3,000,000 / (1 + 0.06)^6
≈ 3,000,000 / (1.4185109231)
≈ 2,112,347.22
She must deposit approximately P2,112,347.22 today to have P3,000,000 saved by the end of six
years at a 6% annual interest rate compounded annually.

7. How much would you have to deposit today in an account that pays 7% annual interest,
compounded quarterly, if you wish to have a balance of P100,000 at the end of 10 years?
 = 100,000 / (1 + 0.07/4)^(4*10)
= 100,000 / (1 + 0.0175)^(40)
≈ 100,000 / (1.0175)^40
≈ 100,000 / 1.81132014559
≈ 55,198.19
You would need to deposit approximately P55,198.19 today in an account that pays 7% annual
interest, compounded quarterly, to have a balance of P100,000 at the end of 10 years.

8. Suppose you have two investment opportunities that promise P5,000,000 in 20 years.
Investment Bank 1: A return of 6% per year compounded monthly
Investment Bank 2: A return of 4.6% per year, compounded quarterly
Which bank will you invest your money?
Investment Bank 1
r = 6% or 0.06
n = 12 (compounded monthly)
t = 20 years

= 5,000,000(1 + 0.06/12)^(1220)
≈ 5,000,000(1 + 0.005)^(240)
≈ 5,000,000(1.53061530186)
≈ 7,653,076.51

Investment Bank 2
r = 4.6% or 0.046 (in decimal form)
n = 4 (compounded quarterly)
t = 20 years

5,000,000(1 + 0.046/4)^(420)
≈ 5,000,000(1 + 0.0115)^(80)
≈ 5,000,000(2.71867888641)
≈ 13,593,394.43
I’ll invest my money in Investment Bank 2, which offers a return of 4.6% per year compounded
quarterly, which will yield a higher future value of approximately P13,593,394.43 compared to
Investment Bank 1.