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Math Help - Working out the interest rate on respective investment offers.....

  1. #1
    Junior Member
    Joined
    Jan 2010
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    Question Working out the interest rate on respective investment offers.....

    Hey guys,

    Im stuck on this tutorial question, I can work out the yield no problem for parts 1 and 2 but am stuck on 3 and 4. Can anyone give a helping hand. Will I have to use interpolation in these parts?

    Let
    25,000 be invested in an account at the present time. In return for this initial investment,
    the investor receives either:

    (1)
    35,900 in 5 years time, or

    (2)
    50,300 in 10 years time, or

    (3) A series of 5 annual payments of
    5,800 each, the first such payment being made today.

    (3) A series of 5 annual payments of
    8,600 each, the first such payment being made after 5 years.

    Rank the alternatives on the basis of their respective yields, with the alternative having the highest
    yield ranked first and so on.
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  2. #2
    Junior Member
    Joined
    Jan 2010
    Posts
    43
    I was able to solve last with interpolation, Thanks anyway. If anyone has time could they see what answer they get for this question. Its using the interpolation method again. The answer is between 4-5% to save you time. I think Im going wrong with my formula.



    At the beginning of each year for 10 years,
    4,800 is deposited in a savings account which pays
    a certain fixed rate of interest per annum. At the time of the last payment, the proceeds of the
    account are used to purchase a level annuity payable annually in arrears for 15 years at the same
    fixed rate of interest as that paid on the savings account. If the annuity instalment is
    5,500, find

    the rate of interest payable on the savings account.
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  3. #3
    MHF Contributor
    Joined
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    Thanks
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    The accumulated value of the 4800 annuity must fund the 5500 annuity.

    So the accumulated value of the 4800 annuity must equal the present value of the 5500 annuity.

    4800 \frac{(1+i)^{10} - 1}{i} = 5500 \frac{1 - (1+i)^{-15}}{i}

    i got 4.5124% as a solution to this
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