Week 5 question 2 Review

qrb501_week_5_review.xlsx

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Question 1

Barry learned in an online investment course that he should start investing as soon
as possible. He had always thought that it would be smart to start investing after he
finishes college and when his salary is high enough to pay the bills and to have money
left over. He projects that will be 5–10 years from now. Barry wants to compare the
difference between investing now and investing later. A financial advisor who spoke
to Barry suggested that a Roth IRA (Individual Retirement Account) would be a good
investment for him to start.
1. If Barry purchases a $2,000 Roth IRA when he is 25 years old and expects to
earn an average of 6% per year compounded annually over 35 years (until he is
60), how much will accumulate in the investment?
Initial Investment (PV)
Quoted Rate
Compounding Frequency	Choose one
Number of compoundings (m)	For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE
Number of Years
NPER (Num. of years * m)
Ending Amount (FV)
2. If Barry doesn’t put the money in the IRA until he is 35 years old, how much
money will accumulate in the account by the time he is 60 years old using the same
return of 6%? How much less will he earn because he invested 10 years later?
Initial Investment (PV)
Quoted Rate
Compounding Frequency	Choose one
Number of compoundings (m)	For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE
Number of Years
NPER (Num. of years * m)
Ending Amount (FV)
Difference in amount earned
FV Part 1 minus FV Part 2
3. Barry knows that the interest rate is critical to the speed at which your investment grows.
For instance, if $1 is invested at 2% compounded annually, it takes approximately 34.9 years
to double. If $1 is invested at 5% compounded annually, it takes approximately
14.2 years to double.
Determine how many years it takes $1 to double if invested at 10% compounded annually; at
12% compounded annually.
Hint: The easiest way to get the answer is to use the Rule of 72.
Years to double the investment = 72 ÷ interest rate
4. At what interest rate would you need to invest to have your money double
in 10 years if it is compounded annually?
PV
FV
NPER
RATE	-- Use the RATE function in Excel. PV should be negative, FV should be positive. PMT should be blank.

Question 2

Abdol Akhim has just come from a Personal Finance class where he learned that he
can determine how much his savings will be worth in the future. Abdol is completing
his two-year business administration degree this semester and has been repairing
computers in his spare time to pay for his tuition and books. Abdol got out his savings
records and decided to apply what he had learned. He has a balance of $1,000 in a
money market account at First Savings Bank, and he considers this to be an emergency
fund. His instructor says that he should have 3–6 months of his total bills in an
emergency fund. His bills are currently $700 a month. He also has a checking account and a
regular savings account at First Savings Bank, and he will shift some of his funds from
those accounts into the emergency fund. One of Abdol’s future goals is to buy a house.
He wants to start another account to save the $8,000 he needs for a down payment.
1. How much interest will Abdol receive on $1,000 in a 365-day year if he keeps
it in the money market account earning 1.00% compounded daily?
Initial Investment (PV)	$1,000
Quoted Rate	1.00%
Compounding Frequency	Daily	Choose one
Number of compoundings (m)	365	For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE	0.0027%
Number of Years	1
NPER (Num. of years * m)	365	I=PRT
Ending Amount (FV)	$1,010.00	10
Compound Interest	$10.00
2. How much money must Abdol shift from his other accounts to his emergency fund
to have four times his monthly bills in the account by the end of the year?
Desired Emergency fund	$2,800	700
Current balance in money mkt.	$1,000
Interest that Abdol will earn	$10.00
Balance to be transferred	$1,790.00
3. Abdol realizes he needs to earn more interest than his current money market can provide.
Using annual compounding on an account that pays 5.5% interest annually, find the amount
Abdol needs to invest to have the $8,000 down payment for his house in 5 years.
Future Value Needed (FV)	$8,000
Quoted Rate	5.5%
Compounding Frequency	Annually	Choose one
Number of compoundings (m)	5	For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE	27.5000%	PV =FV/1 + Future value/ (1 + Annual interest Rate)^-number of periods.
Number of Years	5
NPER (Num. of years * m)	1.375
Amount Invested Now (PV)	$6,121.00
4. Is 5.5% a realistic rate for Abdol to earn in a relatively short-term investment of 5 years, particularly at his bank?
Hint: For answering this question, explore how much interest do banks pay on short-term investments or CDs.
Compare this number with 5.5% to see whether it is a realistic goal. If not, propose to Abdol what should he invest in
instead.
Since banks normally pay less than 1% for savings accounts, 5.5% is better than average. If he can invest $6,121.00 he can reach his goals of $8000 in 5 years.

Question 3

At 45 years of age, Seth figured he wanted to work only 10 more years. Being a full-time landlord had a lot
of advantages: cash flow, free time, being his own boss—but it was time to start thinking toward retirement.
The real estate investments that he had made over the last 15 years had paid off handsomely. After selling a
duplex and paying the associated taxes, Seth had $350,000 in the bank and was debt-free. With only 10 years
before retirement, Seth wanted to make solid financial decisions that would limit his risk exposure. Fortunately,
he had located another property that seemed to meet his needs— a well maintained four-unit apartment. The
price tag was $250,000, well within his range, and the apartment would require no remodeling. Seth figured he
could invest the other $100,000, and between the two hoped to have $1 million to retire on by age 55.
1. Seth read an article in the local newspaper stating the real estate in the area had appreciated by 5% per year
over the last 30 years. Assuming the article is correct, what would the future value of the $250,000 apartment
be in 10 years?
Initial Investment (PV)
Quoted Rate
Compounding Frequency	Choose one
Number of compoundings (m)	For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE
Number of Years
NPER (Num. of years * m)
Ending Amount (FV)
2. Seth’s current bank offers a 1-year certiﬁcate of deposit account paying 2% compounded semiannually.
A competitor bank is also offering 2%, but compounded daily. If Seth invests the $100,000, how much more
money will he have in the second bank after one year, due to the daily compounding?
Current Bank	Competitor Bank
Semiannually	Daily
Initial Investment (PV)
Quoted Rate
Compounding Frequency	Choose one
Number of compoundings (m)	For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE
Number of Years
NPER (Num. of years * m)
Ending Amount (FV)
Difference in FV	=D36-C36
3. After looking at the results from questions 1 and 2, Seth realizes that a 2% return in a certiﬁcate of deposit
will never allow him to reach his goal of $1 million in 10 years. Presuming his apartment will indeed be worth
$400,000 in 10 years, compute the future value of Seth’s $100,000 investment using a 10%, 15%, and 20% return
compounded semiannually for 10 years. Will any of these rates of return allow him to accomplish his goal of
reaching $1 million by age 55?
10%	15%	20%
Initial Investment (PV)
Quoted Rate
Compounding Frequency	Semiannually	Semiannually	Semiannually
Number of compoundings (m)
Quoted Rate divided by m = RATE
Number of Years
NPER (Num. of years * m)
Ending Amount (FV)
Plus: Apartment Value	$400,000	$400,000	$400,000
Total FV	=FV + Apartment Value
Which rate of return allows him to accomplish his goal of reaching $1 million?	Choose one
4. A friend of Seth’s who is a real estate developer needs to borrow $80,000 to ﬁnish a development project.
He is desperate for cash and offers Seth 18%, compounded monthly, for 2.5 years. Find the future value of
the loan.
Initial Investment (PV)
Quoted Rate
Compounding Frequency	Choose one
Number of compoundings (m)	For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE
Number of Years
NPER (Num. of years * m)
Ending Amount (FV)
5. After purchasing the apartment, Seth receives a street, sewer, and gutter assessment for $12,500 due in 2 years.
How much would he have to invest today in a CD paying 2%, compounded semiannually, to fully pay the assessment in 2 years?
Future Value Needed (FV)
Quoted Rate
Compounding Frequency	Choose one
Number of compoundings (m)	For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE
Number of Years
NPER (Num. of years * m)
Amount Invested Now (PV)