Anonymous

Nora Lenderbee, manager of the local branch of Illgott and Gaines, has decided to hire you as a Personal Investment Wealth Enhancer. The firm’s president, Hugh Don Wannono, requires that all new employees complete a basic discounted cash flow knowledge case. The individualized case is based on a current client’s investment position. Your client is Bill Shredder, a local accounts payable manager.

Mr. Shredder has twin daughters that are approaching college age. He has managed to save \$75,000. He’s interested in investment options for the funds. His questions follow.

(1) Suppose he invests the funds in a one-year CD.

a) What is the account balance if the CD pays 3.25%?

b) What if the CD pays 2.25%? If it pays 4.25%?

c) What if the CD pays 3.25% compounded quarterly? What if it is compounded daily?

d) What rate must be quoted on the annual CD to equal the return on the daily compounded CD?

(2) Suppose he invests the funds in a five-year CD. What are the results from each of the above scenarios (a-d)?

(3) Instead of investing the lump sum, Mr. Shredder is considering saving \$17,500 per year for each of the next five years. If he invests the funds at the end of each year, what is this type of investment called? Suppose that he earns 3.25%. What is ending value? What lump sum invested today at 3.25% yields the same future sum as the series of deposits?