Question 1

What do you need to know to be able to calculate the fair market value of an investment that will deliver two future payments?

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The answer of What do you need to know to...

Question 2

If you purchase an investment privately, how do you determine the maximum price you are prepared to pay?

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Question 3

For principal amounts of $5,000 to $49,999, a bank pays an interest rate of 0.95% on 180- to 269-day non-redeemable GICs, and 1.00% on 270- to 364-day non-redeemable GICs. Ranjit has $10,000 to invest for 364 days. Because he thinks interest rates will be higher six months from now, he is debating whether to choose a 182-day GIC now (and reinvest its maturity value in another 182-day GIC) or to choose a 364-day GIC today. What would the simple interest rate on 182-day GICs have to be on the reinvestment date for both alternatives to yield the same maturity value 364 days from now?

Accepted Answer

The answer of For principal amounts of $5,000 to $49,999,...

Question 4

Calculate the price on its issue date of $100,000 face value, 90-day commercial paper issued by G E Capital Canada if the prevailing market rate of return is 0.932 simple interest%.

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The answer of Calculate the price on its issue date...

Question 5

Joan has savings of $12,000 on June 1. Since she may need some of the savings during the next 3 months, she is considering two options at her bank. (1) An Investment Builder savings account earns a 0.25% rate of interest. The interest is calculated on the daily closing balance and paid on the first day of the following month. (2) A 90- to 179-day cashable term deposit earns a rate of 0.8%, paid at maturity. If simple interest rates do not change and Joan does not withdraw any of the funds, how much more will she earn from the term deposit up to September 1? (Keep in mind that savings account interest paid on the first day of the month will itself subsequently earn interest during the subsequent month.)

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The answer of Joan has savings of $12,000 on June...

Question 6

On a $10,000 principal investment, a bank offered simple interest rates of 1.45% on 270- to 364-day GIC's and 1.15% on 180- to 269-day GICs. How much more will an investor earn from a 364-day GIC than from two consecutive 182-day GICs? (Assume that the interest rate on 180- to 269-day GICs will be the same on the renewal date as it is today. Remember that both the principal and the interest from the first 182-day GIC can be invested in the second 182-day GIC.)

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The answer of On a $10,000 principal investment, a bank...

Question 7

An Investment Savings account offered by a trust company pays a rate of 0.25% on the first $1,000 of daily closing balance, 0.5% on the portion of the balance between $1,000 and $3,000, and 0.75% on any balance in excess of $3,000. What simple interest will be paid for the month of April if the opening balance was $2,439, $950 was deposited on April 10, and $500 was withdrawn on April 23?

Accepted Answer

The answer of An Investment Savings account offered by a...

Question 8

Suppose that the current rates on 60 and 120-day GICs are 1.50% and 1.75% simple interest, respectively. An investor is weighing the alternatives of purchasing a 120-day GIC versus purchasing a 60-day GIC and then reinvesting its maturity value in a second 60-day GIC. What would the interest rate on 60-day GICs have to be 60 days from now for the investor to end up in the same financial position with either alternative?

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The answer of Suppose that the current rates on 60...

Question 9

An assignable loan contract executed three months ago requires two payments to be paid five and ten months after the contract date. Each payment consists of a principal portion of $1,800 plus interest at 5% on $1,800 from the date of the contract. The payee is offering to sell the contract to a finance company in order to raise cash. If the finance company requires a return of 10% simple interest, what price will it be prepared to pay today for the contract?

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The answer of An assignable loan contract executed three months...

Question 10

Claude Scales, a commercial fisherman, bought a new navigation system for $10,000 from Coast Marine Electronics on March 20. He paid $2,000 in cash and signed a conditional sales contract requiring a payment on July 1 of $3,000 plus interest on the $3,000 at a rate of 8%, and another payment on September 1 of $5,000 plus interest at 8% from the date of the sale. The vendor immediately sold the contract to a finance company, which discounted the payments at its required return of 12% simple interest. What proceeds did Coast Marine receive from the sale of the contract?

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The answer of Claude Scales, a commercial fisherman, bought a...

Question 11

An assignable loan contract executed 3 months ago requires two payments of $3,200 plus interest at 9% from the date of the contract, to be paid 4 and 8 months after the contract date. The payee is offering to sell the contract to a finance company in order to raise urgently needed cash. If the finance company requires a 16% simple interest rate of return, what price will it be prepared to pay today for the contract?

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The answer of An assignable loan contract executed 3 months...

Question 12

An agreement stipulates payments of $4,500, $3,000, and $5,500 in 4, 8, and 12 months, respectively, from today. What is the highest price an investor will offer today to purchase the agreement if he requires a minimum simple interest rate of return of 5.5%?

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The answer of An agreement stipulates payments of $4,500, $3,000,...

Question 13

A contract requires payments of $1,500, $2,000, and $1,000 in 100, 150, and 200 days, respectively, from today. What is the value of the contract today if the payments are discounted to yield a 3.5% simple interest rate of return?

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The answer of A contract requires payments of $1,500, $2,000,...

Question 14

For amounts between $10,000 and $24,999, a credit union pays a rate of 1.25% simple interest on term deposits with maturities in the 91 to 120-day range. However, early redemption will result in a rate of 0.55% being applied. How much more interest will a 91-day $20,000 term deposit earn if it is held until maturity than if it is redeemed after 80 days?

Accepted Answer

The answer of For amounts between $10,000 and $24,999, a...

Question 15

A money market mutual fund purchased $1 million face value of Honda Canada Finance Inc. 90-day commercial paper 28 days after its issue. What price was paid if the paper was discounted at 2.10% simple interest?

Accepted Answer

The answer of A money market mutual fund purchased $1...

Question 16

Paul has $20,000 to invest for 6 months. For this amount, his bank pays 1.3% simple interest on a 90-day GIC and 1.5% on a 180-day GIC. If the interest rate on a 90-day GIC is the same 3 months from now, how much more interest will Paul earn by purchasing the 180-day GIC than by buying a 90-day GIC and then reinvesting its maturity value in a second 90-day GIC?

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The answer of Paul has $20,000 to invest for 6...

Question 17

Calculate the price of a $25,000, 91-day Province of British Columbia Treasury bill on its issue date if the current market rate of return is 3.672% simple interest.

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The answer of Calculate the price of a $25,000, 91-day...

Question 18

A savings account pays interest of 1.5% simple interest. Interest is calculated on the daily closing balance and paid at the close of business on the last day of the month. A depositor had a $2,239 opening balance on September 1, deposited $734 on September 7 and $627 on September 21, and withdrew $300 on both September 10 and September 21. What interest will be credited to the account at the month's end?

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The answer of A savings account pays interest of 1.5%...

Question 19

An agreement stipulates payments of $4,000, $2,500, and $5,000 in 3, 6, and 9 months, respectively, from today. What is the highest price an investor will offer today to purchase the agreement if he requires a minimum simple interest rate of return of 6.25%?

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The answer of An agreement stipulates payments of $4,000, $2,500,...

Question 20

A conditional sale contract requires two payments 3 and 6 months after the date of the contract. Each payment consists of $1,900 principal plus simple interest at 10.5% on $1,900 from the date of the contract. One month into the contract, what price would a finance company pay for the contract if it requires an 16% rate of return on its purchases?

Accepted Answer

The answer of A conditional sale contract requires two payments...

Quiz 7: Applications of Simple Interest