Quantitative Techniques Narrative
Abdol Akhim has just come from a Personal Finance class where he learned that he
can determine how much his savings will be worth in the future. Abdol is completing
his two-year business administration degree this semester and has been repairing
computers in his spare time to pay for his tuition and books. Abdol got out his savings
records and decided to apply what he had learned. He has a balance of $1,000 in a
money market account at First Savings Bank, and he considers this to be an emergency
fund. His instructor says that he should have 3–6 months of his total bills in an
emergency fund. His bills are currently $700 a month. He also has a checking account and a
regular savings account at First Savings Bank, and he will shift some of his funds from
those accounts into the emergency fund. One of Abdol’s future goals is to buy a house.
He wants to start another account to save the $8,000 he needs for a down payment.
1. How much interest will Abdol receive on $1,000 in a 365-day year if he keeps
it in the money market account earning 1.00% compounded daily?
Initial Investment (PV) $1,000
Quoted Rate 1.00%
Compounding Frequency Daily Choose one
Number of compoundings (m) 365 For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE 0.0027%
Number of Years 6
NPER (Num. of years * m) 2190
Ending Amount (FV) $8,000.00
Compound Interest $332.25
2. How much money must Abdol shift from his other accounts to his emergency fund
to have four times his monthly bills in the account by the end of the year?
Desired Emergency fund $2,800
Current balance in money mkt. $1,000
Interest that Abdol will earn $332.25
Balance to be transferred $1,800.00
3. Abdol realizes he needs to earn more interest than his current money market can provide.
Using annual compounding on an account that pays 5.5% interest annually, find the amount
Abdol needs to invest to have the $8,000 down payment for his house in 5 years.
Future Value Needed (FV) $8,000
Quoted Rate 5.5%
Compounding Frequency Annually Choose one
Number of compoundings (m) 5 For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
Quoted Rate divided by m = RATE 1.1000%
Number of Years 5
NPER (Num. of years * m) 25
Amount Invested Now (PV) $1,455.00
4. Is 5.5% a realistic rate for Abdol to earn in a relatively short-term investment of 5 years, particularly at his bank?
Hint: For answering this question, explore how much interest do banks pay on short-term investments or CDs.
Compare this number with 5.5% to see whether it is a realistic goal. If not, propose to Abdol what should he invest in
instead.
According to research on th current interest rates, the rates that are used in this question seem inline with the current rates that are offered. The highest rate for a money market account is 1.1% with no additional fees and the lowest is 0.26% with no additional fees.
