Chapter 2 Homework

1. Juan borrows 11,000 at an annual effective rate of 6%. At the end of t years, he repays the loan
with a payment of 23,462.21.

Determine t .

Solution:
11, 000(1  0.06)t  23, 462.21
(1.06)t  2.132928182
t  ln(2.132928182) / ln(1.06)  13

2. Six and a half years ago, John invested 8500 in an account. Today the account is worth 14,358.

Calculate the annual effective interest rate that John has earned over the last six and a half
years.

Solution:
8500(1  i)6.5  14,358
(1  i)6.5  1.689176471
1.6891764711/6.5  1.083994121  i  8.4%

3. Matt invests 1000 today at an annual effective rate of 10%.

a. Determine how long it will take for Matt’s money to double.

Solution:
1000(1  .10)t  2000
(1.10)t  2
t  ln(2) / ln(1.10)  7.27254

b. If Matt had used the Rule of 72 to estimate how long it would take for his money to
double, what would his estimate have been?

Solution:
0.72 0.72
  7.2
i 0.10

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

4. Shashank borrows 22,500 to purchase a car. Using the Rule of 72, he estimates that he will need
to repay 45,000 at the end five years.

Determine the actual amount that Shashank will need to repay at the end of five years.

Solution:
0.72
 5  i  0.144
i
22,500(1  0.144)5  44, 087.21

5. Simon invests 1000 today. Based on the Rule of 72, Simon expected to have 4000 at the end of
24 years.

Determine the interest rate that Simon is earning.

Solution:
.72
 12  i  0.06
i
To double twice, it takes 24 years. To double once, it takes 12 years.

6. Grant has agreed to repay a loan with a payment of 2000 at the end of one year and 4000 at the
end of 2 years. The loan has an annual effective interest rate of 6.15%.

Determine the amount of Grant’s loan.

Solution:
2000(1  0.0615)1  4000(1  0.0615) 2  5434.06

7. Yunlu borrows 23,000 and agrees to repay the loan with two payments of P . The first payment
will be at the end of one year and the second payment will be at the end of 3 years.

Yunlu’s loan has an interest rate of 5% compounded semi-annually.

Determine P .

Solution:
0.05 2*3 0.05 2*2
23, 000(1  )  P(1  ) P
2 2
or
0.05 2 0.05 6
23, 000  P(1  )  P(1  )
2 2
P  12, 678.38

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

8. Ross borrows 2000 and agrees to make two payments of 1100. The first payment is at the end
of one year and the second payment is at the end of two years.

Determine the annual effective interest rate that Ross is paying.

Solution:
2000(1  i ) 2  1100(1  i )  1100

2000 x 2  1100 x  1100  0

1100  11002  4(2000)(1100)

 1.065964601  x
2(2000)

x  1 i

i  1.065964601  1  6.59646%

9. Songyan invests 2000 in the STARR Fund. Songyan withdraws 750 from the Fund at the end of
year 1, year 2, and year 3. Songyan has no money left in the fund at the end of three years after
making the last withdrawal.

Determine Songyan annual effective return on the money in STARR Fund.

Solution:
Financial calculator:
CF0=2000
C01=-750
F01=3
CPT IRR = 6.12856

10. Taylor borrows 10,000 and agrees to repay it with payments of 2700 at the end of each year for
the next 3 years.

Calculate the annual effective interest rate that Taylor is paying on the loan.

Solution:
This question is flawed – Do not work

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

11. Rushan borrows 10,000 to be repaid with a payment of 6264.46 at time T and a payment of
6264.46 at time 2T . The annual effective rate on the loan is 7%.

Determine T in months.

Solution:
CF 0  10, 000
C 01  6264.46
F 01  2
IRR CPT  16.443076%

(1.07)T  1.16443076

ln1.16443076
T  2.250008 years *12  27months
ln1.07

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

12. Kristen, Sarah, and Grant enter into a financial arrangement. Kristen agrees to pay 2200 to
Sarah today. Sarah agrees to pay Kristen 1000 at the end of two years. Sarah also agrees to pay
Grant 1400 at the end of two years. Finally, Grant agrees to pay Kristen 1600 at the end of 4
years.

Determine the annual effective interest rate for each person in this arrangement.

Solution:
Look at Kristen’s cash flows.

-2200 1000 1600

0 2 4
2200 = 1000(1 + i) -2 + 1600(1 + i) -4

Let x = (1 + i) -2 and x2 = (1 + i) -4

1600x2 + 1000x – 2200 = 0

Use quadratic formula.

1000  10002  4 1600  2200 

x  0.90103049
2 1600 

1
1  i   0.90103049  i   0.90103049  2  1  0.0534896
2

Look at Sarah’s cash flows.

2200 -2400

0 2 4

2200  2400(1  i)2  (1  i)2  1.09090909  i  0.0444659

Look at Grant’s cash flows.

1400 -1600

0 2 4

1400  1600(1  i)2  (1  i)2  1.142857143  i  0.069045

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

13. Cong, Erik, and Yifei enter into a financial arrangement. Cong agrees to pay Erik 3000 today. He
also agrees to pay Yifei 1000 at the end of one year. At the end of three years, Yifei will pay
Cong 4000. At the end of two years, Erik will pay X to Yifei and 1000 to Cong.

Using the bottom line approach, the annual yield rate or interest rate is the same for Cong and
Yifei.

Calculate X .

Solution:
Cong: -3000 -1000 +1000 +4000
Erik: +3000 -X-1000
Yifei: +1000 +X -4000
For Cong use the financial calculator:
CF0= -3000
CO1= -1000
CO2=1000
CO3=4000
CPT IRR= 9.14%
Yifei:

0  1000 1.0914   X 1.0914   4000 1.0914 

1 2 3

4000 1.0914   1000 1.0914 

3 1

X
1.0914 
2

X  2573.56

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

14. Haoran, Jiayi, and Yinzhe are business partners. As part of their partnership, Haoran pays Jiayi
100,000 today. Additionally, at the end of 5 years, Jiayi agrees to pay 120,000 to Yinzhe. Finally,
at the end of T years, Yinzhe pays Haoran a total of 172,800.

Using the bottom line approach, all three partners have the same annual yield.

Determine T .

Solution:

Using Jiayi’s cash flows, we can find the interest rate using our financial calculators.
CF0=100000
C01=0
F01=4
C02= -120000
CPT IRR= 3.7137%
Now using this interest rate we can find T either using Haoran’s or Yinzhe’s cash flows. I will
use Haoran’s:

0  100000  172800 1.037137 

T

0.5787  1.037137T
ln(0.5787)
T   15 years
ln(1.037137)

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

15. Dylan borrows 50,000 from Bian Bank which will be repaid with two payments of 29,000. The
two payments will be made at the end of three years and at the end of six years. When Bian
Bank received the payment of at the end of three years, it reinvests that payment at 8% interest.

Taking into account reinvestment, determine the annual effective return earned by Bian on this
loan.

Solution:

Dylan will be reinvesting the payments he receives. So at time six his investments will be worth
29000(1.08)3  29000  65531.648 .
Setting this value equal to the amount he originally lent to Bian, we can find his annual return.

65531.648  50000(1  i )6
65531.648
i6  1  4.61168%
50000

16. Kyle loans Nic an amount of X to be repaid with two payments of 1000. The first payment is
two years from the date of the loan and the second payment is 6 years from the date of the
loan. Kyle reinvests that first payment at 10%.

Taking into account reinvestment, Kyle earned an annual effective rate of 12.23%.

Calculate X .

Solution:
X (1.1223)6  1000(1.10)4  1000  X  1233.12

17. Madi borrows 12,000 from Kevin. Madi will repay the loan with a payment of 6500 at the end of
one year and 7000 at the end of two years. Kevin reinvests that first payment at an annual
effective interest rate of r .

Taking into account reinvestment, Kevin realizes an annual effective return of 7.224%.

Determine r .

Solution:
12000(1.07224)2  6500(1  r )  7000  r  4.56%

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

18. Elena has an account at Basham Brokerage House. She has made the following deposits and
withdrawals over the last two years.

Date Deposits Withdrawals Balance Before Cash Flow

January 1, 2013 5000 0 0
March 1, 2013 4000 0 6000
July 1, 2013 0 6000 9,000
May 1, 2014 2000 0 4,000
December 31, 2014 0 0 7,000

a. EstimateElena’s dollar weighted annual return using simple interest.

Solution:

A   Ct  I  B
A  5000
B  7000
C t  4000  6000  2000  0
5000  0  I  7000
I  2000
I 2000 2000
j    0.41379
A   Ct (1  t ) 5000  4000(1  2 )  6000(1  6 )  2000(1  16 ) 4833.33
24 24 24

1
1  i  (1  j )  (1.41379)1/2  1  i  1.189030  i  18.9030%
T

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

b. Calculate Elena’s exact annual dollar weighted return using the cash flow functionality in
the BA II Plus.

Solution:
Treat Cash Flows as monthly because cash flows must be evenly spaced:

CF 0  5000
C 01  0; F 01  1
C 02  5000; F 02  1
C 03  0; F 03  3
C 04  4000; F 04  1
C 05  0; F 05  9
C 06  3000; F 06  1
C 07  0; F 07  7
C 08  15, 000; F 08  1

IRR CPT  1.435966669%

Since the periods are months, the IRR is the monthly

i (12)
effective interest rate which is  1.435966669%
12

12
 i (12) 
(1  i )  1    (1  0.01435966669)  i  18.6598%
12

 12 

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

19. Jing has a bank account balance of X on January 1, 2013. During the next two years Jing deposits
8000 into his account and withdraws 3000. On January 1, 2015, Jing has a bank account balance
of 28,400.

Assuming that all cash flows occur on January 1, 2014, Jing estimates his annual dollar weighted
return assuming simple interest to be 4.5383664%.

Calculate X.

Solution:
A X
B  28, 400
k  0.5
C  8000  3000  5000
I  23, 400  X

(1  j )0.5  (1  i)  1.045383664  j  1.045383664 2  1  0.09287005

I 23, 400  X
j  0.092827005 
A  C (1  k ) X  5000(0.5)

0.092827005( X  2500)  23400  X

X  21, 200

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

20. Joe invested 50,000 in an account three years ago. One year ago, the account had a balance of
90,000 and Joe withdrew 45,000.

Today, Joe has 30,000 in the account.

Determine the annual effective time weighted return earned by Joe on this account.

Solution:

B0 90, 000
1  j1    1.8
B1 50, 000

B2 30, 000
1  j2    0.666666
B1  C1 90, 000  45, 000

1  j TW  (1  j1 )(1  j2 )  (1.8)(.6666666)  1.2

1  iTW  (1  j TW )1/T  1  iTW  (1.2)1/3  iTW  .0626586

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

21. Elena has an account at Basham Brokerage House. She has made the following deposits and
withdrawals over the last two years.

Date Deposits Withdrawals Balance Before Cash Flow

January 1, 2013 5000 0 0
March 1, 2013 4000 0 6000
July 1, 2013 0 6000 9,000
May 1, 2014 2000 0 4,000
December 31, 2014 0 0 7,000

Calculate Elena’s annual time weighted return.

Solution:

B0 6000
1  j1    1.2
B1 5000

B2 9000
1  j2    0.9
B1  C1 6000  4000

B3 4000
1  j3    1.33333
B2  C2 9000  6000

B4 7000
1  j4    1.16666
B3  C3 4000  2000

1  j TW  (1.2)(0.9)(1.33333)(1.16666)  1.68

1  iTW  (1.68)1/2  iTW  29.6148%

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

22. Evgeny invests in the Marano Mutual Fund. Over the next two years, Evgeny realizes an annual
time weighted yield of 12.5%.

Evgeny initially invests 100,000 with Marano and has 103,551.14 at the end of two years.
During the two year period, Evgeny also withdrew an amount of C to buy a new car. Before
the amount was withdrawn, the fund was worth 110,000.

Calculate C.

Solution:

First, let’s find the time weighted yield for the period of two years.

(1  jTW )1/T  (1  iTW )

jTW  (1.125) 2  1  0.265625

Now we can solve for C

 110000  103551.14 
1  0.265625    
 100000  110000  c 

 110000  103551.14 
c  110000      20, 000
 100000  1.265625 

February 3, 2015
Copyright Jeffrey Beckley 2014 2015
 Chapter 2 Homework

Answers
1. 13
2. 8.4%
3.
a. 7.27254 years
b. 7.2 years
4. 44,087.21
5. 6%
6. 5434.06
7. 10,405.74
8. 6.59646%
9. 6.12856%
10. 9.83909%
11. 27 Months
12. Kristen => 5.34896% ; Sarah => 4.44659% ; Grant => 6.90450%
13. 2573.56
14. 15 years
15. 4.61168%
16. 1233.12
17. 4.56%
18.
a. 18.9030%
b. 18.6598%
19. 21,200
20. 6.26586%
21. 29.6148%
22. 20,000

February 3, 2015
Copyright Jeffrey Beckley 2014 2015