Ok. Math Problem 1.
On August 13, 2001, you could buy $10,000 US Treasurey bonds that pay simple interest of
- 5.51% per year in February each year through maturity in February 2031, at a cost of $9,802 each; or
- 11.25% per year in February each year through 2015, at a cost of $15,529 each.
Each bond also returns $10,000 at maturity.
a) What is the annual yield of each investment?
b) Compare these two investment opportunities, which differ vastly in interest rate but also in cost.
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Here are the notes I took down when we discussed this problem in class:
- You buy a bond for a certain amount of money. Ex: $9,802.
- Every year you earn simple interest on the face value of the bond. Ex: 5.51% on $10,000 - paid to you each year.
- So, in 2001 you pay $9,802; every year you get $551. In 2031 you get $10,000. So, total amount: 551x30+10,000.
Part B)
- You pay $15,529 to buy a bond with a face value of $10,000; 11.25% interest; 15-year term
- Annual Yield = total interest/your principal
Jill Tracy's favorite San Francisco haunt:
I took him [Thomas Truax] to one of my favorite secret treasures, the Columbarium. Off the beaten path even for most San Franciscans, the Columbarium's eerie history is as spellbinding as walking inside its ornate interiors. Nestled in a secluded two-acre garden spot, it beckons-- a beguiling copper-domed neoclassical 1897 Victorian building with brilliant stained glass windows and the cremated ashes of over 30,000 bodies housed in lovingly decorated niches. Row after row, story after story. It's dizzying. Few people realize that this structure was originally the centerpiece of a 167-acre cemetery and crematorium. Take heed superstitious folks: The Richmond District was entirely cemeteries until a 1901 law made burial illegal in San Francisco, and other laws in the 1930s mandated the removal of all graves to newly created Colma, "City of the Dead." The Columbarium was abandoned in 1934 and lay dormant for some 40 years until The Neptune Society painstakingly restored it. The restoration is a fascinating tale in itself, as the building and it's alcoves were grotesquely infested with pigeons, raccoons, and massive fungi, mushrooms growing everywhere. Not to mention the ghosts.
The Columbarium
Thanks, Kristin. The cavaties are not a surprise. I have been avoiding the dentist.
Mini-rant: The next stranger who pats me on the shoulder or on the head is going to lose some fingers. Tonight's offender merely was told not to touch me.
Sorry, vw, that's outside my realm. I think I taught that stuff last year, but my brain is a little too fried right now to remember it. What answer are you getting and how are you getting it, and what's the answer in the back of the book say?
vw, right off the top of my head, it looks like the 1st year is only .5 a year (august to february).
So, in 2001 you pay $9,802; every year you get $551. In 2031 you get $10,000. So, total amount: 551x30+10,000.
Not (551x30+10,000) - 9,802? And that half year thing - is it an even six months?
ETA, also, is the interest compounding or are you taking it out each year?
vw, right off the top of my head, it looks like the 1st year is only .5 a year (august to february).
That's a good point.
Hil, I'm getting 5.576 % for the first one, and the back of the book says 5.62%.
Simple interest, so not compounding.
ETA, also, is the interest compounding or are you taking it out each year?
I think it's taking it out each year--$551 is what I have in my notes from when we talked about it in class.
And, looking at this, it might be the six month thing. I'm close, I'm just not exactly there.
I think you are thinking too much about Annual Yield - just take the interest earned each year and divide by the cost 551/9082=.056213=5.62%
