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ADM 3351 Lecture Notes - Lecture 2: Zero-Coupon Bond, Dirty Price, Premium Bond

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pearpig174
13 Dec 2017
School
University of Ottawa
Department
Administration
Course
ADM 3351
Professor
Chen Guo

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Document Summary

Money has time value because of the opportunity to invest it at some interest rate. Example: you deposit with a bank for one year. The bank promises to pay you the principle amount back in one year plus interest. You may interpret that the annual interest rate is 8%, with which the future value of your deposit can be found by the compounding formula as. If you extend your deposit and the interest with the bank for another year, your future value will be. The bank may tell you that it is going to invest and reinvest your deposit semiannually, i. e. , twice a year. However, there is no reason why you should care how the bank is going to spend the. 1 money that you lend to the bank. All you care is that the bank will pay you the principle back plus interest at the end of the year.

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Related Questions

A grandmother is looking for a plan to finance her new grandchild’scollege education. She has $25,000 to invest. Search the internetand locate a long-range investment plan, CD, Savings Bond, etc, forthe grandmother. The plan is to earn compound interest.

Calculate the future value of the investment. You must use theadvertised interest rate, the number of compounding periods peryear, and the time the funds will be invested. If you are not giventhe number of compounding periods a year, make it up.

•The principal is $25,000. This is p.
•Research the annual interest rate for your investment. This isr.
•State the time in years for the investment (as in when the newgrandchild will be attending college). This is t.
•State the number of compounding periods per year. This is n.
•Model the future value of Grandma’s investment as an exponentialfunction, with time as the independent variable:
?F(t) = P(1 + r/n) nt
•State the future value of Grandma’s investment

using the annuityformula:

F = (Pn/r)[(1 + (r/n))nt+1 − 1]

where:

F is the future value of ALL of theinvestments/loans, including interest.

• P is the principal amount invested or paid at the beginning ofeach period.

• r is the annual interest rate, written as a decimal (ex: 6%=.06).

• n is the number of times that interest is compounded peryear.

• t is the number of years the money is invested orborrowed.

Suppose you invest P at the beginning of each month in aretirement account in hopes to save $600,000 for retirement at theage of 65. For both the annual rates r = 3.2% and r = 8.05%,compounded monthly, find the amount of money you will need toinvest per month:

A. if you start this process as soon as you turn 23 (so youinvest for 42 years total).

B. if you start this process as soon as you turn 30 (so youinvest for 35 years total).

C. if you start this process as soon as you turn 40 (so youinvest for 25 years total).

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