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A 5-year investment note offers a 10% return [#permalink]
25 Dec 2012, 14:54

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Difficulty:

55% (hard)

Question Stats:

60% (03:14) correct
40% (02:19) wrong based on 85 sessions

A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?

A. $ 6,000 B. $ 6,048 C. $ 6,100 D. $ 6,150 E. $ 6,200

I don't understand when the question says: "A 5-year investment note offers a 10% return on purchase". Here, I think that the note pays the 10% at the end of the five years. So, if the note is sold in the second year, the interest will be Capital*0.10*(2 years / 5 years). In addition, the phrase "a compounding 5% for each year after the first" doesn't indicate that that amount will be calculated after the capitalization of the original 10%. I say this because, according to the OE, this is the solution:

P*1.1*1.05 - 500 = 6430 P is the original Price.

IMO, this question is not good at all. What do you think? Do you expect something like this in the real GMAT? Does it worth the time of studying it? Thanks!

Re: A 5-year investment note offers a 10% return [#permalink]
25 Dec 2012, 22:18

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Expert's post

danzig wrote:

A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?

A. $ 6,000 B. $ 6,048 C. $ 6,100 D. $ 6,150 E. $ 6,200

Hii danzig. Since the note was redeemed after 2 years, so a penalty of $500 has to be submitted. So the amount that is redeemed after 6430 is after the deduction of $500. Hence the amount after being compounded is 6930. Let the initial amount be P. After the return, the amount becomes 1.1P. Now use this 1.1P as the principle in the compound interest formula to get the amount 6930. \(A=1.1P(1+5/100)\) where A=6930. Therefore, use \(6930=1.1P(1+5/100)\) to get P as $6000. Hope that helps. _________________

Re: A 5-year investment note offers a 10% return [#permalink]
07 Jan 2013, 21:51

1

This post received KUDOS

Marcab wrote:

danzig wrote:

A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?

A. $ 6,000 B. $ 6,048 C. $ 6,100 D. $ 6,150 E. $ 6,200

Hii danzig. Since the note was redeemed after 2 years, so a penalty of $500 has to be submitted. So the amount that is redeemed after 6430 is after the deduction of $500. Hence the amount after being compounded is 6930. Let the initial amount be P. After the return, the amount becomes 1.1P. Now use this 1.1P as the principle in the compound interest formula to get the amount 6930. \(A=1.1P(1+5/100)\) where A=6930. Therefore, use \(6930=1.1P(1+5/100)\) to get P as $6000. Hope that helps.

Hi Marcab, Why u have used 1.1P ? 10% interest is for 5 yrs right? He took in 2 yrs then how come? _________________

GMAT - Practice, Patience, Persistence Kudos if u like

Re: A 5-year investment note offers a 10% return [#permalink]
07 Jan 2013, 22:26

1

This post received KUDOS

Expert's post

Hii Shan. Read the question carefully.

Quote:

A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first.

For first year, the simple interest rate is 10% and for the subsequent years the compond interest rate is 5%. Thats why I took 1.1P after 1st year. Hope that helps. _________________

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