Chapter 8
Review Exercises
- If $4,000 is borrowed from April 3 to June 22 at a simple interest rate of 3.8%, how much interest is paid on the loan? (Answer: I = $33.32)
- A savings account pays flat-rate interest of 1.45%. If a balance of $3,285.40 is maintained for the entire month of August, how much interest does the savings account earn? (Answer: I = $4.05)
- A 182-day $1,000,000 Government of British Columbia T-bill was issued when the market rate of return was 4.21%. Calculate the purchase price of the T-bill on its issue date. (Answer: P = $979,439.29)
- If you place $8,000 into a 300-day short-term GIC at Scotiabank earning 0.95% simple interest, how much will you receive when the investment matures? (Answer: S = $8,062.47)
- Proper accounting procedures require accountants to separate principal and interest components on any loan. Allocate the principal and interest portions of a $24,159.18 payment clearing a 147-day loan at 8.88%. (Answer: The principal is $23,325 and the simple interest on the loan is $834.18)
- As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on its date of issue, July 14, when market yields were 2.94%. 234 days later, you sold the note when market yields were 2.76%. What rate of return did you realize on your investment? (Answer: r = 2.96%)
- Sturm put $48,700 into a 10-month term deposit, but needed to withdraw the funds after five months to deal with a family emergency. The credit union penalized him 2.35% off of his interest rate for the early withdrawal and deposited $49,602.98 into his account.
a) What was Sturm’s original interest rate? (Answer: r = 6.8%)
b) How much interest, in dollars, was he penalized for the early withdrawal? (Answer: Penalty = $476.85)
- Three hundred days from now you will be departing on a backpacking trip through Europe. You need $4,000 in spending money to take with you. Today, you currently have saved $3,960.
a) If you place your money in consecutive 100-day short-term GICs earning 1.02%, will you meet your goal? Assume the full maturity values are reinvested into the next GIC. (Answer: With $3,993.30, you are $6.70 short of meeting the goal)
b) What would the interest rate need to be if you had placed your money into a single 300-day short-term GIC to reach your goal? (Answer: r = 1.229%)
- A 364-day, $50,000 face value T-bill is issued when market yields are 2.85%. The T-bill is sold to another investor every 91 days until maturity, with yields of 3.1%, 2.98%, and 3.15% on each of the dates of sale, respectively. Compute the purchase price for each investor, including the date of issue. For each investor, calculate the actual rate of return realized on their investment.
(Answers: Date of issue: P = $48,618.18
91 days after issue: P = $48,866.96
182 days after issue: P = $49,267.92
273 days after issue: P = $49,610.39
Investor #1: Date of issue to 91 days: r = 2.05%
Investor #2: 91 days to 182 days: r = 3.29%
Investor #3: 182 days to 273 days: r = 2.79%
Investor #4: 273 days to maturity: r = 3.15%)
