Exam 7: Applications of Simple Interest

A $100,000, 168-day Government of Canada Treasury bill was purchased on its date of issue to yield 2.1%. a) What price did the investor pay? b) Calculate the market value of the T-bill 85 days later if the rate of return then required by the market has: (i) risen to 2.4%. (ii) remained at 2.1%. (iii) fallen to 1.8%. c) Calculate the rate of return actually realized by the investor if the T-bill is sold at each of the three prices calculated in part (b).

On January 20, Samantha borrowed $17,000 from her revolving line of credit. The current annual interest rate at the time was 4.5%. On May 5, Samantha borrowed another $10,000. Due to an increase in borrowing, the annual interest rate increased to 4.75%. On August 12, Samantha repaid the total amount borrowed, along with interest. Determine the interest amount to be repaid.

Seth had accumulated Canada Student Loans totalling $5,200 by the time he graduated from Mount Royal College in May. He arranged with the Bank of Nova Scotia to select the floating-rate option (at prime plus 2½%) and to begin monthly payments of $110 on December 31. Prepare a loan repayment schedule up to and including the February 28 payment. The prime rate was initially at 3.25%. It dropped by 0.25% effective January 31. Seth made an additional principal payment of $300 on February 14.

If you purchase an investment privately, how do you determine the maximum price you are prepared to pay?

Mr. Michaluk has a $50,000 personal (revolving) line of credit with the Canadian Imperial Bank of Commerce (CIBC). The loan is on a demand basis at a floating rate of prime plus 1.5%. On the fifteenth of each month, a payment equal to the greater of $100 or 3% of the combined principal and accrued interest is deducted from his chequing account. The principal balance after a payment on September 15 stood at $23,465.72. Prepare the loan repayment schedule from September 15 up to and including the payment on January 15. Assume that he makes the minimum payments and the prime rate remains at 5.25%.

A contract requires payments of $1,500, $2,000, and $1,000 in 100, 150, and 200 days, respectively, from today. What is the value of the contract today if the payments are discounted to yield a 3.5% rate of return?

Calculate the maturity value of a 120-day, $1,000 face value note dated November 30, 2014, and earning interest at 4.75%.

Ms. Wadeson obtained a $15,000 demand loan from the Canadian Imperial Bank of Commerce on May 23 to purchase a car. The interest rate on the loan was prime plus 2%. The loan required payments of $700 on the 15^th of each month, beginning June 15. The prime rate was 4.5% at the outset, dropped to 4.25% on July 26, and then jumped by 0.5% on September 14. Prepare a loan repayment schedule showing the details of the first five payments.

A $100,000, 91-day Province of Ontario Treasury bill was issued 37 days ago. What will it sell at today in order to yield the purchaser 3.14%?

If the average rate of return on 168-day Government of Canada Treasury bills sold at the Tuesday auction was 2.35%, what price was paid for a $100,000 face value T- bill?

The purchaser of a 168 day T-bill with a face value of $100,000 paid $97,320.00 for it. After 60 days, interest rates had increased and she sold the T-bill for $97,833.95. What rate of return per annum did she realize while holding the T-bill?

Determine the issue price of a 91-day, $100,000 Government of Alberta Treasury Bill that was issued at a discount rate of 5.75%.

Determine the legal due date for a three-month note dated October 6, 2013.

An investment promises two payments of $500 on dates 3 and 6 months from today. If the required return on investment is 9%: a) What is the value of the investment today? b) What will its value be in 1 month if the required rate of return remains at 9%? c) Give an explanation for the change in value as time passes.

What will be the maturity value of $15,000 placed in a 120-day term deposit paying an interest rate of 2.75%, if the term deposit proceeds are reinvested into another 120-day term deposit paying 3.5%?

Calculate and compare the market values of a $100,000 face value Government of Canada Treasury bill on dates that are 91 days, 61 days, 31 days, and one day before maturity. Assume that the rate of return required in the market stays constant at 3% over the lifetime of the T-bill.

An investor is prepared to buy short-term promissory notes at a price that will provide him with a return on investment of 12%. What amount would he pay on August 9 for a 120-day note dated July 18 for $4,100 with interest at 10.25% pa?

An agreement stipulates payments of $4,500, $3,000, and $5,500 in 4, 8, and 12 months, respectively, from today. What is the highest price an investor will offer today to purchase the agreement if he requires a minimum rate of return of 5.5%?

A $500,000 268-day Treasury Bill was issued to Buyer #1 at 4.1 %. 168 days before the T-Bill reached maturity it was sold by Buyer #1 at a rate that would provide Buyer #2 with a return of 3.4% if Buyer #2 held the T-Bill to maturity. What annual simple rate did Buyer #1 actually realize over the period that Buyer #1 held the T-Bill?

The current rates on 90- and 180-day GICs are 5.5% and 6% simple interest, respectively. An investor is trying to decide whether to purchase a 90-day GIC and then reinvest its maturity value in a second 90-day GIC. What would the interest rate on 90-day GICs have to be 90 days from now for the investor to end up in the same financial position with either alternative?