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Math Help - Cheque from the proceeds of an investment

  1. #1
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    Cheque from the proceeds of an investment

    Kurt receives a cheque for $38,500 which was the proceeds of an investment (interest plus capital) made 6 months ago at 8.5% p.a. How much did he invest?

    Is the answer to this problem $905,882.35?

    Thank you to all who can help correct me.
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  2. #2
    Member garymarkhov's Avatar
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    Quote Originally Posted by JadeKiara View Post
    Kurt receives a cheque for $38,500 which was the proceeds of an investment (interest plus capital) made 6 months ago at 8.5% p.a. How much did he invest?

    Is the answer to this problem $905,882.35?

    Thank you to all who can help correct me.
    You've specified that the cheque includes interest PLUS capital, so the amount invested (the capital) will be some amount less than $38,500.
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    I really don't understand this problem. I have tried for hours. Please help me.
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  4. #4
    Member garymarkhov's Avatar
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    Quote Originally Posted by JadeKiara View Post
    Kurt receives a cheque for $38,500 which was the proceeds of an investment (interest plus capital) made 6 months ago at 8.5% p.a. How much did he invest?
    You haven't said how frequently interest is compounded, so I will assume it is once per year. That's the safest bet if it's not specified... but let me know if you left that information out.

    So, assuming simple interest (interest compounded once per year), my calculation is:

    x = initial investment amount

    x(1+0.085/2) = 38500

    x = 38500/1.0425

    x = 36,930.46

    Does that make sense?
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    Is this using the formula P=I(1+r)^n?

    And yes, that is the problem with my teacher. He never specifies anything.
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  6. #6
    Member garymarkhov's Avatar
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    Quote Originally Posted by JadeKiara View Post
    Is this using the formula P=I(1+r)^n?
    No. In fact, I don't believe the left hand side is equivalent to the right hand side. I think you might be thinking of

    P+I=P(1+r/n)^{nt}

    Or you may have seen it in this form:

    FV=PV(1+r/n)^{nt}

    where r is the annual interest rate, n is the number of compounding periods per year, and t is the number of years the money is invested.

    In any case, since we're dealing with simple interest here, that formula won't work for us. We don't want any exponents. This is how I worked through it:

    x = initial investment amount

    x(0.085) = interest earned over a full year

    x(0.085)/2 = interest earned over half a year

    x(0.085)/2 + x = interest earned over half a year plus principle

    x(0.085)/2 + x = 38,500

    x(1+0.0425) = 38,500

    38,500/1.0425 = 36,930.46

    So I suppose if I had to put that down to a formula that looks like the one you gave, I would write

    FV=PV(1+rm/n)

    where r is the interest rate, m is the number payment periods, and n is the inverse of the fraction of a year during which the money is invested.

    Quote Originally Posted by JadeKiara View Post
    And yes, that is the problem with my teacher. He never specifies anything.
    Yeah, it's often a problem with people who don't know what they're doing. Tell him (nicely) that the question is grossly incomplete if it doesn't include both the interest rate and the number of compounding periods per year.
    Last edited by garymarkhov; September 6th 2009 at 06:59 PM. Reason: misstyped 0.0845 where it should have been 0.085
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  7. #7
    Member garymarkhov's Avatar
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    So I suppose if I had to put that down to a formula that looks like the one you gave, I would write

    FV=PV(1+rm/n)

    where r is the interest rate, m is the number payment periods, and n is the inverse of the fraction of a year during which the money is invested.
    I'm going to slightly redefine the terms to make things (hopefully) simpler

    r is the annual interest rate (0.085 in our example)

    n is the number of times interest would be paid over the course of a year if the money were left invested for a year or more (2 in our example).

    m is the number of potential payment periods during which the money was actually left invested (1 in our example).

    Some formulas just say that I=Prt, where I is interest, P is principle, r is the rate per period, and t is time. But saying r is the rate per period just means you have to do an extra calculation to find r before plugging it into the formula.
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