Okay, here are the solutions to the word problems I gave you earlier.
I've included the
steps so you can follow along!
***
### Simple Interest
**Problem 1: The Lemonade Stand Loan 🍋**
* **Principal (P):** \$200
* **Interest Rate (r):** 8% per year = 0.08
* **Time (t):** 9 months = 9/12 = 0.75 years
**Interest (I) = P \* r \* t**
I = 200 \* 0.08 \* 0.75 = \$12
**Total Amount to Repay = P + I**
Total = 200 + 12 = \$212
**Answer:** Lily will owe \$12 in interest, and she needs to repay a total of \$212.
### Compound Interest
**Problem 2: The College Fund 🎓**
* **Principal (P):** \$5,000
* **Interest Rate (r):** 6% per year = 0.06
* **Compounding Periods (n):** Quarterly = 4 times per year
* **Time (t):** 18 years
**Amount (A) = P \* (1 + r/n)^(nt)**
A = 5000 \* (1 + 0.06/4)^(4\*18)
A = 5000 \* (1 + 0.015)^(72)
A = 5000 \* (1.015)^(72)
A ≈ 5000 \* 2.89476
A ≈ \$14,473.80
**Answer:** There will be approximately \$14,473.80 in the account when Alex turns 18.
### Simple Annuity
**Problem 3: The Scooter Savings 🛴**
* **Future Value (FV):** \$450
* **Payment (PMT):** \$75
* **Interest Rate (r):** 4% per year = 0.04, so monthly rate is 0.04/12 = 0.003333
* **Number of Periods (n):** ?
**FV = PMT \* \[((1 + r)^n - 1) / r]**
450 = 75 \* \[((1 + 0.003333)^n - 1) / 0.003333]
6 = \[((1.003333)^n - 1) / 0.003333]
0. 02 = (1.003333)^n - 1
1. 02 = (1.003333)^n
Now, take the natural logarithm (ln) of both sides:
ln(1.02) = n \* ln(1.003333)
n = ln(1.02) / ln(1.003333)
n ≈ 5.98
**Answer:** It will take Mia approximately 6 months to save enough money to buy the
scooter.
### General Annuity
**Problem 4: The Car Loan 🚗**
* **Principal (P):** \$15,000
* **Interest Rate (r):** 7.5% per year = 0.075, so monthly rate is 0.075/12 = 0.00625
* **Time (t):** 5 years = 60 months
**(a) Monthly Payment (PMT) = P \* \[r(1 + r)^n] / \[(1 + r)^n - 1]**
PMT = 15000 \* \[0.00625(1 + 0.00625)^60] / \[(1 + 0.00625)^60 - 1]
PMT = 15000 \* \[0.00625(1.00625)^60] / \[(1.00625)^60 - 1]
PMT ≈ 15000 \* \[0.00625(1.4547)] / \[1.4547 - 1]
PMT ≈ 15000 \* \[0.009092] / \[0.4547]
PMT ≈ 15000 \* 0.0200
PMT ≈ \$299.76
**(b) Total Interest Paid = (PMT \* n) - P**
Total Interest = (299.76 \* 60) - 15000
Total Interest = 17985.60 - 15000
Total Interest = \$2985.60
**Answer:** David's monthly payment is approximately \$299.76, and he will pay a total
of \$2985.60 in interest over the life of the loan.
**Problem 5: The Retirement Plan 🌇**
* **Payment (PMT):** \$1,200
* **Interest Rate (r):** 8% per year = 0.08, so quarterly rate is 0.08/4 = 0.02
* **Time (t):** 30 years = 120 quarters
**(a) Future Value (FV) = PMT \* \[((1 + r)^n - 1) / r]**
FV = 1200 \* \[((1 + 0.02)^120 - 1) / 0.02]
FV = 1200 \* \[((1.02)^120 - 1) / 0.02]
FV ≈ 1200 \* \[(10.745 - 1) / 0.02]
FV ≈ 1200 \* \[9.745 / 0.02]
FV ≈ 1200 \* 487.25
FV ≈ \$584,700
**(b) Total Money Deposited = PMT \* n**
Total Deposited = 1200 \* 120
Total Deposited = \$144,000
**Answer:** Sarah will have approximately \$584,700 in her retirement account when
she retires, and she will deposit a total of \$144,000 into the account over the 30 years.
***
I hope these solutions help you understand the problems better! Let me know if
anything is unclear or if you want to go through any of the steps in more detail! 😊
Okay, here are the answers to the multiple-choice questions!
***
1. **(b) Simple Interest**
2. **(a) Future Value**
3. **(c) \$100**
4. **(c) The principal plus accumulated interest**
5. **(a) FV = PV(1 + rt)**
6. **(b) \$1,157.63**
7. **(b) A series of equal payments made at regular intervals**
8. **(b) Payment**
9. **(a) Rent payments made monthly**
10. **(a) Equal to**
11. **(b) \$2,481.77**
12. **(c) The payment interval differing from the interest compounding period**
13. **(a) Monthly mortgage payments with interest compounded semi-annually**
14. **(a) Present Value**
15. **(c) PV = PMT \[1 - (1 + r)^-n) / r]**
16. **(b) \$401.26**
17. **(b) Annuity Due**
18. **(b) Simple interest is calculated on the principal only, while compound interest is
calculated on the principal and accumulated interest**
19. **(b) It increases the future value**
20. **(d) The color of the money**
***
How did you do? Let me know if you have any questions about any of the answers! 😊