Question 1

(a) Beginning this year, Mary is planning to save $800.00 each year for the next six years to take a vacation to commemorate the seventh year of her career. Assuming the interest rate offered by her bank is 9 percent annually, how much will Mary have in the account at the end of seven years? If Mary increases her savings to $1,500.00 annually, will this be enough to take care of her vacation which is estimated to cost $15,000.00. Calculate her account balance at end of seven years.

(b) Your grandmother gave you an inheritance of $65,000.00, and you have done some shopping around for the best interest rates over the next year and is about to decide on which would offer you the best return.

(i) Which investment offers you the highest EAR?

Stated Rate Compounding

8.90% 1

8.90% 2

8.85% 12

(ii) Now assume that you wish to invest your money for only six months and the annual compounded rate of 8.90 percent is not available. Which of the remaining investments would you choose?