Question

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

Answer 1

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

Step-by-step 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