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# A 5-year investment note offers a 10% return

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Manager
Joined: 11 Aug 2012
Posts: 110
Schools: HBS '16, Stanford '16
A 5-year investment note offers a 10% return  [#permalink]

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25 Dec 2012, 15:54
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65% (hard)

Question Stats:

65% (02:33) correct 35% (02:52) wrong based on 160 sessions

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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! ##### Most Helpful Community Reply VP Status: Been a long time guys... Joined: 03 Feb 2011 Posts: 1008 Location: United States (NY) Concentration: Finance, Marketing GPA: 3.75 Re: A 5-year investment note offers a 10% return [#permalink] ### Show Tags 25 Dec 2012, 23:18 4 2 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. _________________ ##### General Discussion Manager Joined: 04 Oct 2011 Posts: 168 Location: India Concentration: Entrepreneurship, International Business GMAT 1: 440 Q33 V13 GPA: 3 Re: A 5-year investment note offers a 10% return [#permalink] ### Show Tags 07 Jan 2013, 22:51 1 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 VP Status: Been a long time guys... Joined: 03 Feb 2011 Posts: 1008 Location: United States (NY) Concentration: Finance, Marketing GPA: 3.75 Re: A 5-year investment note offers a 10% return [#permalink] ### Show Tags 07 Jan 2013, 23:26 1 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. _________________ Manager Joined: 22 Aug 2013 Posts: 73 Schools: ISB '15 Re: A 5-year investment note offers a 10% return [#permalink] ### Show Tags 09 Apr 2014, 08:37 Hi Bunuel, Which is the fastest method to do these kind of questions. _________________ Veritas Prep - 650 MGMAT 1 590 MGMAT 2 640 (V48/Q31) Please help the community by giving Kudos. Intern Joined: 10 Apr 2013 Posts: 12 Location: United States (TX) Concentration: Finance, Entrepreneurship GMAT 1: 740 Q50 V41 GPA: 3.3 WE: Analyst (Investment Banking) Re: A 5-year investment note offers a 10% return [#permalink] ### Show Tags 03 Sep 2015, 12:51 1 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

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!

I converted to fractions to make it easier to cancel and divide.

$$(P*1.1*1.05)-500=6430$$

$$P*\frac{11}{10}*\frac{21}{20}=6930$$

$$P*11*21=6930*10*20$$

$$P=\frac{6930*10*20}{11*21}$$

$$P=\frac{693*10*10*20}{11*3*7}$$

$$P=\frac{231*10*10*20}{11*7}$$

$$P=\frac{11*21*10*10*20}{11*7}$$

$$P=3*10*10*20=6000$$
Manager
Joined: 21 Apr 2016
Posts: 163
Re: A 5-year investment note offers a 10% return  [#permalink]

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12 Nov 2016, 21:12
How is it implicit that 10% is calculated annually? The question says 5-year investment that yields 10% which means 2% every year.
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Re: A 5-year investment note offers a 10% return  [#permalink]

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22 Oct 2018, 10:46
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Re: A 5-year investment note offers a 10% return   [#permalink] 22 Oct 2018, 10:46
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