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

  • Thread starter Thread starter rain
  • Start date Start date
  • Tags Tags
    Finance Homework
AI Thread Summary
To calculate the simple interest rate for a stock investment, the total return including dividends should be considered, resulting in an adjusted amount of $24.50 instead of $24, yielding a simple interest rate of approximately 11.36%. For the developer's loan, the compound interest formula must account for quarterly compounding, leading to a total interest amount of about $51,089.32 over five years. It's important to clarify whether the principal is repaid in full at the end of the term, as this affects the calculation method. The discussion highlights the need for precise application of interest formulas in both stock and loan scenarios.
rain
Messages
11
Reaction score
0
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.
 
Physics news on Phys.org
rain said:
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
 
Last edited by a moderator:
for 1) the rate is 11.36%
for 2) the interest is $51089.32
am i correct?
 
That's what I get.
 
thanks a lot
 
I picked up this problem from the Schaum's series book titled "College Mathematics" by Ayres/Schmidt. It is a solved problem in the book. But what surprised me was that the solution to this problem was given in one line without any explanation. I could, therefore, not understand how the given one-line solution was reached. The one-line solution in the book says: The equation is ##x \cos{\omega} +y \sin{\omega} - 5 = 0##, ##\omega## being the parameter. From my side, the only thing I could...
Back
Top