Please answer problem 3 and 4 in its entirety and show work. 3. (4 points) (the

ID: 2329042 • Letter: P

Question

Please answer problem 3 and 4 in its entirety and show work.

3. (4 points) (the principal amount) plus a monthly interest rate of 4%, paying it in equal amounts at the start of each of the following four months. How much will you be paying her and when? Today, you are borrowing $1,000 from a friend. She wants you to return that money HINT: use the formula from question 1 .assume the amount you are looking for is X draw a cash flow diagram showing each ?X .convert each X back to a present value; write down in an equation that when they are added, they should total the amount borrowed. solve for X points) amount of S100 at compound interest, compounded annually for 12 years. 4. (2 For ie 5%, find the difference between the amount of $100 at simple interest and the

Explanation / Answer

Answer for Question No. 3

We will use discounting method to solve the question :

Formula is X (FV) = PV x ( 1 + r/12)nx12 Therefore total X = 1050.91$

Principal is 1000$ & Interest is 50.91$

Month

Cash Flow (PV)

No. of Months Interest Received (n)

Calculation X = CF x ( 1 + r/12)nx12

Therefore, X = by solving equation

250

X = 250x(1+0.04/12)4x12

250x(1.0033)48 = 270.57

250

X = 250x(1+0.04/12)3x12

250x(1.0033)36 = 265.27

250

X = 250x(1+0.04/12)2x12

250x(1.0033)24 = 260.08

250

X = 250x(1+0.04/12)1x12

250x(1.0033)12 = 254.99

Converting X into Present value by following equation

PV = FV / (1 + r)n therefor PV = 1050.91 ( 1 + 0.04/12 ) 4x12 = 1000$ approx.

Answer of Question No. 4

X = Future Value, P = Principle (100$), n = Time & r = rate of interest (5%)

Simple Interest

FV = P (1+nr)

X = 100 [1+(12*0.05)]

X = 160 $

Compound Interest

FV = P (1+r)n

X = 100 (1+0.05)12

X = 134 $

Therefore Difference between Simple & Compound Interest rate is 26$ (160$ - 134$)