How Do You Calculate Simple and Compound Interest in Stock and Loan Investments?

[rain]

I need some help on some finance questions
1) A stock that sold for $22 at the beginning of the year was selling for $24 at the end of the year. If the stock paid a dividend of $0.50 per share, what is the simple interest rate on an investment in thei stock?

the simple interest rate formula is
A=P(1+rt)
so A=24
P=22
t=1
r=?
am I on the right tract? What do you do with the $0.50 per share?

2. A developer needs $ 80,000 to buy land. He is able to borrow the money at 10% per year compounded quarterly. How much will the interest amount to if he pays off the load in 5 years?

compound interest formula is
A=P(1+i)^n...do you use this formula?
I don't really understand what the question is asking.

Thanks.

 

[HallsofIvy]

I need some help on some finance questions
1) A stock that sold for $22 at the beginning of the year was selling for $24 at the end of the year. If the stock paid a dividend of $0.50 per share, what is the simple interest rate on an investment in thei stock?
the simple interest rate formula is
A=P(1+rt)
so A=24
P=22
t=1
r=?
am I on the right tract? What do you do with the $0.50 per share?

If the stock was sold for $24 after receiving the dividend of $0.50, so you actually get back $24.50. Use that formula with A= 24.50, not 24 and solve for r.

2. A developer needs $ 80,000 to buy land. He is able to borrow the money at 10% per year compounded quarterly. How much will the interest amount to if he pays off the load in 5 years?
compound interest formula is
A=P(1+i)^n...do you use this formula?
I don't really understand what the question is asking.
Thanks.

Can we assume that he pays the $80,000 principal back at the end of the 5 years? Because if he pays back part of the principal each month, say, the formula becomes a lot more complicated!
Yes, assuming that, as I just said, he has to pay interest on the entire $80,000 for the entire 5 years, you can use A= P(1+i)ⁿ. However, because it is "compounded quarterly" you have to figure it in quarters. i= 0.10/4= 0.025, the interest per quarter instead of per year. And, of course, n= 4*5= 20 quarters, not 5 years. Taking P= 80000, find A. That's the entire amount paid- principle and interest. Subtract the $80,000 principle to find how much of it was interest.
You can approximate that, to check your answer, by using simple interest. At 10% interest for 5 years, his interest would amount to 5*10%= 50%. 50% of $80,000 is $40,000. Of course, compounded quarterly, his interest will amount to more than that.

Since this problem doesn't have anything to do with "Calculus and Analysis" and looks to me like homework, I am moving it

 

[rain]

for 1) the rate is 11.36%
for 2) the interest is $51089.32
am i correct?

 

[HallsofIvy]

That's what I get.

 

[rain]

thanks a lot