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# An investor buys a bond of a certain company for \$1000 and

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An investor buys a bond of a certain company for \$1000 and [#permalink]

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02 Jul 2004, 01:45
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An investor buys a bond of a certain company for \$1000 and leaves for a one-year vacation. At the moment of buying, the bonds are going to increase at the annual rate of 8% compounded quarterly. However, after the first quarter, the investment starts losing its value at the same rate. When the investor is back, what the difference (rounded to dollars) he will see between expected and real balances?

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Senior Manager
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02 Jul 2004, 02:08
I hope i understood this correctly -

Expected = 1000*1.02^4 = 1082

Real = 1000*1.02*(0.98)^3 = 960

Expected - Real = 1082-960 = 122.

I hope i am wrong because the calculations here are very time consuming.
It doesn't look like a GMAT question.

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Senior Manager
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02 Jul 2004, 10:14
This is not a GMAT-like question.
This sort of question is being tested on CFA, where it takes 10 seconds to solve, but you're given a calculator as well.

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02 Jul 2004, 10:35
CFA type indeed. Did you write the exam in June Iastoscka?
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Best Regards,

Paul

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02 Jul 2004, 15:17
Well, if answer choices had something around 120, I would have taken it.
It's just to know that expected is slightly over 1080 since it's compounded quarterly and realized is about 1020-60 = 960. Difference between the 2 is approx. 120
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Paul

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03 Jul 2004, 05:29
This one is from the CPA exam. I forgot to mention that calculators are permitted.

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07 Jul 2004, 06:54
Without using Calculator, (didn't notice the time) an approximation will be 500\$

after first Q, 1080
Expected after second quarter ~ 1161, 3rd Q ~ 1254 , 4th Q ~ 1354
Actual
2ndQ ~ 998, 3rd Q ~ 919, 4th Q ~ 845.
Diff ~ \$500.

(A simpler way to guess, calculate the simple interest take diffence and guess the nearest value, if u r running out of time)!

(Forgot the formula for compund interest while doing this question!! )

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07 Jul 2004, 07:49
mba wrote:
Without using Calculator, (didn't notice the time) an approximation will be 500\$

after first Q, 1080
Expected after second quarter ~ 1161, 3rd Q ~ 1254 , 4th Q ~ 1354
Actual
2ndQ ~ 998, 3rd Q ~ 919, 4th Q ~ 845.
Diff ~ \$500.

(A simpler way to guess, calculate the simple interest take diffence and guess the nearest value, if u r running out of time)!

(Forgot the formula for compund interest while doing this question!! )

What you did was equivalent to annual interest rate of 32%. Question says:
Quote:
annual rate of 8% compounded quarterly

The above is equivalent to 2% quartely compounding, not 8% quartely compounding
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Best Regards,

Paul

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08 Jul 2004, 02:21
Shit! What a stupid mistake

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08 Jul 2004, 02:21
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