Holooly Plus Logo
Holooly Plus Logo

Question 10.EX.3: DIFFERENT INTEREST RATES FOR DIFFERENT PERIODS Consider a $5...

DIFFERENT INTEREST RATES FOR DIFFERENT PERIODS

Consider a $50,000 investment in a one-year bank certificate of deposit (CD) today and rolled over annually for the next two years into one-year CDs. The future value of the $50,000 investment will depend on the one-year CD rate each time the funds are rolled over. Assume that the one-year CD rate today is 5% and that it is expected that the one-year CD rate one year from now will be 6%, and the one-year CD rate two years from now will be 6.5%.

a. What is the future value of this investment at the end of three years?

b. What is the average annual return on your CD investment?

The Blue Check Mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

a. FV = $50,000(1 + 0.05)(1 + 0.06)(1 + 0.065) = $59,267.25

b. i = \sqrt[3]{\frac{ \$ 59,267.25}{ \$ 50,000} }   − 1 = 5.8315%

Related Answered Questions

Suppose that you are given the opportunity to purchase an investment for $5,000 that promises to pay $50 at the end of every period forever. What is the periodic interest per period—the return—associated with this investment?

Verified Answer:
We know that the present value is PV = $5,000 and ...

PRESENT VALUE OF AN ANNUITY Consider a five-payment annuity, with payments of $500 at the end of each of the next five years. a. If the appropriate discount rate is 4%, what is the present value of this annuity? b. If the appropriate discount rate is 5%, what is the present value of this annuity?

Verified Answer:
a. Given:PMT =$500; i=4%;N=5. Solve for PV. PV =$2...

DEFERRED ANNUITY Suppose you want to retire and be able to withdraw $40,000 per year each year for twenty years after your retirement. If you plan to stop deposits in your retirement account ten years prior to retirement, what is the balance that you must have in your retirement account ten years

Verified Answer:
Balance in the account one year before retirement ...

CALCULATING A YIELD Suppose an investment of $1 million produces no cash flow in the first year but cash flows of $200,000, $300,000, and $900,000 two, three, and four years from now, respectively. What is the return on this investment?

Verified Answer:
The IRR for this investment is the interest rate t...

CALCULATING THE YIELD ON A BOND Consider a bond that has a current price of 90; that is, if the par value of the bond is $1,000, the bond’s price is 90% of $1,000 or $900. And suppose that this bond has five years remaining to maturity and an 8% coupon rate. With five years remaining to maturity,

Verified Answer:
With a coupon rate of 8%, this means that the cash...

FUTURE VALUE OF AN ANNUITY Suppose you wish to determine the future value of a series of deposits of $1,000, deposited each year in the No Fault Vault Bank for five years, with the first deposit made at the end of the first year. If the NFV Bank pays 5% interest on the balance in the account at the

Verified Answer:
In equation form,   F V=\$ 1,000 \sum_...

INTEREST RATES Consider the growth rate of dividends for General Electric. General Electric pays dividends each year. In 1996, for example, General Electric paid dividends of $0.317 per share of its common stock, whereas in 2006 the company paid $1.03 in dividends per share in 2006.

Verified Answer:
This represents a growth rate of 12.507%: i = [lat...

MEETING A SAVINGS GOAL Suppose that the goal is to have $75,000 in an account by the end of four years. And suppose that interest on this account is paid at a rate of 5% per year, compounded semiannually. How much must be deposited in the account today to reach this goal?

Verified Answer:
We are given FV = $75,000, i = 5% × 2 = 2.5% per s...

QUARTERLY COMPOUNDING Suppose we invest $200,000 in an investment that pays 4% interest per year, compounded quarterly. What will be the future value of this investment at the end of 10 years?

Verified Answer:
The given information is: i = 4%/4 = 1% and  N = 1...

GUARANTEED INVESTMENT CONTRACTS A common investment product of a life insurance company is a guaranteed investment contract (GIC). With this investment, an insurance company guarantees a specified interest rate for a period of years. Suppose that the life insurance company agrees to pay 6% annually

Verified Answer:
The amount of the liability (that is, the amount t...