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Three finance problems: Gomez, Bruce and Brenda retirement, FV of payments

1. Gomez Electrics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan in which interest must be paid monthly, and the quoted rate is 8%. Bank B will charge 9%, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks?

2. Today, Bruce and Brenda each have $150,000 in an investment account. No other contributions will be made to their investment accounts. Both have the same goal: They each want their account to reach $1 million, at which time each will retire. Bruce has his money invested in risk-free securities with an expected annual return of 5%. Brenda has her money invested in a stock fund with an expected annual return of 10%. How many years after Brenda retires will Bruce retire?

3. You are currently investing your money in a bank account that has a nominal annual return of 7%, compounded monthly. How many years will it take for you to double your money?

Solution Preview

1. Effective interest rate
= (1+quoted rate/number of payments in a year)^no of payments in year-1
Bank A's effective annual rate=(1+8%/12)^12-1=0.083 or ...

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