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21 July, 19:18

Bill Casler bought a $2000, 9-month certificate of deposit (CD) that would earn 8% annual simple interest. Three months before the CD was due to mature, Bill needed his CD money, so a friend agreed to lend him money and receive the value of the CD when it matured.

Required:

a. What is the value of the CD when it matures?

b. If their agreement allowed the friend to earn a 10% annual simple interest return on his loan to Bill, how much did Bill receive from his friend

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Answers (1)
  1. 21 July, 20:17
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    a. What is the value of the CD when it matures?

    $2,120

    b. If their agreement allowed the friend to earn a 10% annual simple interest return on his loan to Bill, how much did Bill receive from his friend?

    $2,068.29

    Explanation:

    interests earned by the CD = $2,000 x 8% x 9/12 = $120

    the value of the CD at maturity = $2,000 (principal) + $120 (interests) = $2,120

    if the friend wanted to earn 10% on the loan, that is equivalent to 10% x 3/12 = 2.5% for the 3 months

    the amount of money received by Bill from his friend = CD's maturity value / (1 + expected interest) = $2,120 / (1 + 2.5%) = $2,120 / 1.025 = $2,068.29
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