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MAT/205
Finance Application
Finance
When we talk about finance, we’re referring to how we manage our assets over time. A common asset for most of us is money. Are we good at handling our current finances? What if we had more money to manage? This assignment gives us some options to think about.
Application Practice
Answer the following questions. Use Equation Editor to write mathematical expressions and equations. First, save this file to your hard drive by selecting Save As from the File menu. Click the white space below each question to maintain proper formatting (1., 2., 3., a., b., c.). Show all of your work!
1. You have just won $75,000! It’s not enough to quit your day job but you want to invest it wisely. You set a goal to double your money in 20 years. Your idea is to put the money in an interest bearing account and let it grow. What interest rate will you need to accomplish your goal? (Assume the account pays simple interest).
2. Now that you’re taking MAT/205, you are aware that an account that pays compound interest may yield a better return, depending on the rate. The following options are available:
|
Institution |
Interest Rate |
Compound Period |
|
American Finance |
3.75% |
Quarterly |
|
Bank of Phoenix |
3.74% |
Monthly |
|
Commerce Savings |
3.73% |
Daily |
|
District Credit Union |
3.72% |
Continuously |
a. Calculate the amount for each institution with a principal of $75,000 for a period of 20 years.
b. Which institution offers the best return, and why?
3. Again, from your experience as a MAT/205 student, you know that an annuity is another option. Let’s find out the future value of an annuity at 5% annual rate, compounded monthly, after 20 years.
a. You will make deposits into the annuity on a monthly basis. Calculate the amount of the monthly deposit spreading the $75,000 evenly over 20 years.
b. The 5% interest rate is the annual interest rate although it is compounded monthly. What is the monthly interest rate?
c. How many deposits will you make over the 20 year time period?.
d. Calculate the future value of this annuity.
4. $75,000 was a nice amount for an investment, but again not enough to retire on. Let’s say you want a retirement income of $5,000/month for 20 years. How much would you need in an account the day you retire, that pays 7.5% compounded quarterly to achieve the goal of $5,000/month for 20 years?
a. What formula should be used to calculate this amount?
b. Calculate the amount.
MAT/205
