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investment amounts

You have a choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,200 payments and has an interest rate of 8.5 percent compounded monthly. Investment B is an 8 percent continuously compounded lump sum investment, also good for 15 years. How much money would you need to invest in B today for it to be worth as much as investment A 15 years from now?

A local finance company quotes a 16 percent interest rate on one-year loans. So, if you borrow $25,000 the interest for the year will be $4,000. Because you must repay a total of $29,000 in one year, the finance company requires you to pay $29,000/12, or $2,416.67, per month over the next 12 months. Is this a 16 percent loan? What rate would legally have to be quoted? What is the effective annual rate?

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Solution Preview

3. In order to find the amount to invest in B, we first need to know the future value of investment A since that is the amount that investment B should grow to in 15 years.
Investment A is an annuity and so we need to calculate the FV of annuity. The time period is 15 X 12 = 180 months, interest rate is 8.5%/12 = 0.71% and ...

Solution Summary

What is the effective annual rate?