Bill Casler bought a $2000, 9-month certificate of deposit (CD) that would earn 8% annual simple interest. Three months before the CD was due to mature, Bill needed his CD money, so a friend agreed to lend him money and receive the value of the CD when it matured. Required:
a. What is the value of the CD when it matures?
b. If their agreement allowed the friend to earn a 10% annual simple interest return on his loan to Bill, how much did Bill receive from his friend

a. What is the value of the CD when it matures?

b. If their agreement allowed the friend to earn a 10% annual simple interest return on his loan to Bill, how much did Bill receive from his friend?

Explanation:

interests earned by the CD = $2,000 x 8% x 9/12 = $120

the value of the CD at maturity = $2,000 (principal) + $120 (interests) = $2,120

if the friend wanted to earn 10% on the loan, that is equivalent to 10% x 3/12 = 2.5% for the 3 months

the amount of money received by Bill from his friend = CD's maturity value / (1 + expected interest) = $2,120 / (1 + 2.5%) = $2,120 / 1.025 = $2,068.29

answer; automated fingerprint;