Natasha inherits 53,213 on Jan 1 and invests this money in a savings account for 3 years. There are three options for the savings rate: 5% compounded annually, (5-0.125)% compounded quarterly, and (5-0.250)% compounded continuously. She also wants to buy a pick-up truck so she waits for the end of the year and gets the vendor to give her a deal so she can pay for the pickup truck only using the inherited sum. The deal is that she has to make only one payment after (3-1) years. The vendor offers her two options for this payment: either an annual interest rate compounded semi-annually of (5+7)% or ( [X2}+7.75) % compounded continuously. The cash value of the truck today is (53,213-25000). 1) What savings rate should she choose? 2) For the pickup truck, what vendor payment model should she choose? 3) For the rate chosen in (1), what are the effective and nominal annual interest rates? 4) Can she afford the truck?
Natasha inherits 53,213 on Jan 1 and invests this money in a savings account for 3 years. There are three options for the savings rate: 5% compounded annually, (5-0.125)% compounded quarterly, and (5-0.250)% compounded continuously. She also wants to buy a pick-up truck so she waits for the end of the year and gets the vendor to give her a deal so she can pay for the pickup truck only using the inherited sum. The deal is that she has to make only one payment after (3-1) years. The vendor offers her two options for this payment: either an annual interest rate compounded semi-annually of (5+7)% or ( [X2}+7.75) % compounded continuously. The cash value of the truck today is (53,213-25000). 1) What savings rate should she choose? 2) For the pickup truck, what vendor payment model should she choose? 3) For the rate chosen in (1), what are the effective and nominal annual interest rates? 4) Can she afford the truck?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Natasha inherits 53,213 on Jan 1 and invests this money in a savings account for 3 years. There
are three options for the savings rate: 5% compounded annually, (5-0.125) % compounded
quarterly, and (5-0.250) % compounded continuously. She also wants to buy a pick-up truck so
she waits for the end of the year and gets the vendor to give her a deal so she can pay for the
pickup truck only using the inherited sum. The deal is that she has to make only one payment
after (3-1) years. The vendor offers her two options for this payment: either an annual interest
rate compounded semi-annually of (5+7) % or ([X2}+7.75)% compounded continuously. The cash
value of the truck today is (53,213-25000).
1) What savings rate should she choose?
2) For the pickup truck, what vendor payment model should she choose?
3) For the rate chosen in (1), what are the effective and nominal annual interest rates?
4) Can she afford the truck?
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