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Someone plans to invest $10,000 in an account paying 3%  post reply Question banks Downloads My Bookmarks Reviews Important topics Author Message Senior Manager Joined: 14 Jul 2006 Posts: 281 Someone plans to invest$10,000 in an account paying 3% [#permalink]

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18 Aug 2006, 13:10
This topic is locked. If you want to discuss this question please re-post it in the respective forum.

Someone plans to invest $10,000 in an account paying 3% annual interest and compounded semi-annually. How much must he invest in another account paying 5% annual interests and compounded quarterly so that his annual income from the 2 accounts in the first year are the same? Anyone know a shorter way to solve this problem 10,000(1+(3/200))^2= A(1+(5/400))^4 I tried solving it wasted too much time VP Joined: 29 Dec 2005 Posts: 1341 Re: Compounding Problem solving [#permalink] Show Tags 18 Aug 2006, 20:17 apollo168 wrote: Someone plans to invest$10,000 in an account paying 3% annual interest and compounded semi-annually. How much must he invest in another account paying 5% annual interests and compounded quarterly so that his annual income from the 2 accounts in the first year are the same?

Anyone know a shorter way to solve this problem

10,000(1+(3/200))^2= A(1+(5/400))^4
I tried solving it wasted too much time

this is definitely a tough question. to solve this, we need either a scientific calculator or some more information such as PVIF/FVIF so that we can simplify some difficult calculations that are not possible even with a simple calculator. this problem involves some basic financial concepts.

your formula gives you the total value of the investments at the end of year 1. but the question is asking for the interest amount that is equal for both investments. therefore the equations should be as under:

interest at the end of first year for first investment = the interest at the end of first year for the second investment

(10,000)(1.015)^2 - 10,000 = x (1.0125)^4 - x
x = 302.25/0.050945337
x = 5932.83

i used excel for calculations. hope this helps.
Senior Manager
Joined: 14 Jul 2006
Posts: 281

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18 Aug 2006, 21:22
THanks professor,

I was really suprise to find it in the question bank. Thought there was some way to simplify it without to much effort Thanks
CEO
Joined: 20 Nov 2005
Posts: 2894
Schools: Completed at SAID BUSINESS SCHOOL, OXFORD - Class of 2008
Re: Compounding Problem solving [#permalink]

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18 Aug 2006, 22:32
apollo168 wrote:
Someone plans to invest $10,000 in an account paying 3% annual interest and compounded semi-annually. How much must he invest in another account paying 5% annual interests and compounded quarterly so that his annual income from the 2 accounts in the first year are the same? Anyone know a shorter way to solve this problem 10,000(1+(3/200))^2= A(1+(5/400))^4 I tried solving it wasted too much time There is a shorter way: We know (x+y)^4 = x^4 + 4x^3 y+ 4xy^3+6x^2 y^2 + y^4 (x+y)^2 = x^2+2xy+y^2 when y is too small as compared to x then these can be reduced to (x+y)^4 = x^4 + 4x^3 y (x+y)^2 = x^2+2xy As professor said the correct formula is (10,000)(1+3/200)^2 - 10,000 = x (1+5/400)^4 - x Applying the above trick we get: 10000(1 + 6/200)-10000 = x(1+5/100)-x 300 = 5x/100 x = 6000 approx. _________________ SAID BUSINESS SCHOOL, OXFORD - MBA CLASS OF 2008 CEO Joined: 20 Nov 2005 Posts: 2894 Schools: Completed at SAID BUSINESS SCHOOL, OXFORD - Class of 2008 Show Tags 20 Aug 2006, 01:56 apollo168, Is this the correct answer??? _________________ SAID BUSINESS SCHOOL, OXFORD - MBA CLASS OF 2008 Senior Manager Joined: 14 Jul 2006 Posts: 281 Show Tags 20 Aug 2006, 02:03 Hi PS_Dahiya, I think both your answer and the professor's are correct. In the question bank it list 9 thousand something as the correct answer, but I tend to view the answers in it with a lot more suspicion after having found a lot of dubious answers. I think professor used excel to compute so that should settle things 20 Aug 2006, 02:03 Display posts from previous: Sort by Someone plans to invest$10,000 in an account paying 3%

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