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Loan and Investment Interest Calculations

1. The document contains examples of calculating future values and compound interest over various time periods for different interest rates and compounding frequencies. 2. It provides the calculations to determine how much a friend would owe after borrowing money over 4 years at 5% interest, and how much interest the author would pay on a 1.5 million loan over 5 years at 13% interest. 3. The final example calculates that investing 5 million in an account paying 4.6% interest compounded quarterly would yield a higher future value after 20 years than an account paying 6% interest compounded monthly.

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18 views3 pages

Loan and Investment Interest Calculations

1. The document contains examples of calculating future values and compound interest over various time periods for different interest rates and compounding frequencies. 2. It provides the calculations to determine how much a friend would owe after borrowing money over 4 years at 5% interest, and how much interest the author would pay on a 1.5 million loan over 5 years at 13% interest. 3. The final example calculates that investing 5 million in an account paying 4.6% interest compounded quarterly would yield a higher future value after 20 years than an account paying 6% interest compounded monthly.

Uploaded by

loganramen
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Ivan Raphael San Jose

Mod3 HW Problem Solving

1. A friend of yours borrowed P5,000 at 5% interest provided that she pays you back the P5,000
plus interest after 4 years. How much should you receive from her?
= 5,000(1 + 0.05/1)^(1*4)
= 5,000(1 + 0.05)^4
= 5,000(1.05)^4
= 5,000(1.21550625)
≈ 6,077.53

Your friend should pay you back approximately P6,077.53 after 4 years.

2. You borrowed P1,500,000 from the bank and you agree to pay off the loan after 5 years from
now and during that period you paid 13% interest on the loan. How much interest did you pay
for the money that you borrowed?

= 1,500,000 x 0.13 x 5

= 1,950,000

You paid P1,950,000 in interest on the P1,500,000 loan over the course of 5 years.

3. Using the figures in no. 2, what would be the interest in pesos if the interest charge to you was
compounded yearly?

= 1,500,000(1 + 0.13/1)^(1*5)

= 1,500,000(1.13)^5

≈ 1,500,000(1.925414582)

≈ 2,888,121.87

After 5 years, with annual compounding of interest, you would have to pay approximately
P2,888,121.87 in total.

= 2,888,121.87 - 1,500,000

Interest ≈ 1,388,121.87

You would pay approximately P1,388,121.87 in interest if the interest is compounded annually over 5
years.

4. Now let’s assume you were enticed to invest P1,500,000 with 13% interest per annum. How
much will you receive in 5 years?
= 1,500,000(1 + 0.13/1)^(1*5)
= 1,500,000(1.13)^5
≈ 1,500,000(1.925414582)
≈ 2,888,121.87
After 5 years, your P1,500,000 investment at a 13% annual interest rate will grow to
approximately P2,888,121.87.

5. Compute the future value of P6,000 compounded annual for


a. 5 years at 5%
b. 5 years at 8%
c. 10 years at 5%
d. Why is the interest earned in letter “c” not twice the amount earned in letter “a”?

a. 5 years at 5%:
= 6,000(1 + 0.05/1)^(1*5)
= 6,000(1.05)^5
≈ 6,000(1.2762815625)
≈ 7,657.69

b. 5 years at 8%:
= 6,000(1 + 0.08/1)^(1*5)
= 6,000(1.08)^5
≈ 6,000(1.469363536)
≈ 8,816.18

c. 10 years at 5%:
= 6,000(1 + 0.05/1)^(1*10)
= 6,000(1.05)^10
≈ 6,000(1.6288946268)
≈ 9,773.37

d. The interest earned in letter "c" is not twice the amount earned in letter "a" because the interest
earned on an investment doesn't simply double when you double the time period. In letter "a," the
money is invested for 5 years at a 5% annual interest rate, and in letter "c," it is invested for 10 years at
the same 5% annual interest rate.

6. Let’s say your friend wish to have P3,000,000 saved by the end of six years. Suppose that he
deposited this money today in an account that pays 6% interest, compounded annually. How
much must your friend deposit today to meet her goal?
= 3,000,000 / (1 + 0.06/1)^(1*6)
= 3,000,000 / (1 + 0.06)^6
≈ 3,000,000 / (1.4185109231)
≈ 2,112,347.22
She must deposit approximately P2,112,347.22 today to have P3,000,000 saved by the end of six
years at a 6% annual interest rate compounded annually.

7. How much would you have to deposit today in an account that pays 7% annual interest,
compounded quarterly, if you wish to have a balance of P100,000 at the end of 10 years?
= 100,000 / (1 + 0.07/4)^(4*10)
= 100,000 / (1 + 0.0175)^(40)
≈ 100,000 / (1.0175)^40
≈ 100,000 / 1.81132014559
≈ 55,198.19
You would need to deposit approximately P55,198.19 today in an account that pays 7% annual
interest, compounded quarterly, to have a balance of P100,000 at the end of 10 years.

8. Suppose you have two investment opportunities that promise P5,000,000 in 20 years.
Investment Bank 1: A return of 6% per year compounded monthly
Investment Bank 2: A return of 4.6% per year, compounded quarterly
Which bank will you invest your money?
Investment Bank 1
r = 6% or 0.06
n = 12 (compounded monthly)
t = 20 years

= 5,000,000(1 + 0.06/12)^(1220)
≈ 5,000,000(1 + 0.005)^(240)
≈ 5,000,000(1.53061530186)
≈ 7,653,076.51

Investment Bank 2
r = 4.6% or 0.046 (in decimal form)
n = 4 (compounded quarterly)
t = 20 years

5,000,000(1 + 0.046/4)^(420)
≈ 5,000,000(1 + 0.0115)^(80)
≈ 5,000,000(2.71867888641)
≈ 13,593,394.43
I’ll invest my money in Investment Bank 2, which offers a return of 4.6% per year compounded
quarterly, which will yield a higher future value of approximately P13,593,394.43 compared to
Investment Bank 1.

Common questions

Powered by AI

You would need to deposit approximately P55,198.19 today. This is calculated using the formula 100,000 / (1 + 0.0175)^40 ≈ 55,198.19 .

With simple interest, the interest paid is P1,950,000, calculated as 1,500,000 x 0.13 x 5. With annual compounding, the interest is approximately P1,388,121.87, using the formula 1,500,000(1.13)^5 - 1,500,000. Compounded interest results in less paid over 5 years in this example .

You should receive a total of approximately P6,077.53 after 4 years. This is calculated using the formula for compound interest: 5,000(1 + 0.05)^4 = 5,000(1.21550625) ≈ 6,077.53 .

The present value, or the amount that must be deposited today, is approximately P2,112,347.22. This is calculated as 3,000,000 / (1.06)^6 ≈ 2,112,347.22 .

Investment Bank 2, with 4.6% compounded quarterly, yields a higher future value of approximately P13,593,394.43 compared to Bank 1's value of P7,653,076.51, making it the better investment .

The future value is approximately P8,816.18, calculated using the formula 6,000(1.08)^5 ≈ 8,816.18 .

The future value will be approximately P2,888,121.87, calculated using the formula 1,500,000(1.13)^5 ≈ 2,888,121.87 .

Your friend should consider the compounding frequency, interest rates, and total future value. Bank 2, with a lower rate but more frequent compounding, offers a future value of P13,593,394.43, surpassing Bank 1. Additionally, assess risk, fees, and withdrawal penalties .

The difference is due to compound interest, where interest is earned on previously accrued interest. Thus, 6,000(1.05)^10 results in P9,773.37, not simply double of 6,000(1.05)^5 which is P7,657.69 .

Investing P1,500,000 at 13% yields approximately P2,888,121.87 at maturity, while borrowing the same amount results in interest payments of approximately P1,388,121.87. Choosing the investment option allows one to capitalize on compound growth rather than incur greater debt .

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