Problem 5.1 Power Point Slide 13

Suppose your bank account pays interest monthly at an effective annual rateof 6% with monthly compounding available.

You have no money in the bank today. You want to know how much you will need to save at the end of each monthto accumulate $100,000 in 10 years? You use the FV annuity formula to determine that you need to deposit $615.47 at the end of each month to accumulate $100,000 in 10 years.

In determining that you need to deposit $615.47 each month, the first calculation you performed was the conversion of EAR at 6% to a monthly rate of .4868%.

1. . Why did you use calculate the monthly interest factor of .004868 or .4868% instead of .005 or .5% monthly rate (6%/12 months) to solve this problem?

Show computation to support your answer.

Problem 5.4Power Point Slides 46-47

At the start of 2008, one-year U.S. government bond rates were about 3.3%, while the inflation rate that year was 0.1%. At the start of 2018, one-year interest rates were about 1.8%, and the inflation rate that year was about 1.9%.

Note that the real interest rate was negative in 2018, indicating that interest rates were insufficient to keep up with inflation.

Investors in U.S. government bonds were able to buy less at the end of the year than they could have purchased at the start of the year.

1. . Based on the data shown for 2018, why were investors able to purchase less U.S. government bonds at the end of the year than at the beginning of the year?