Ivan put 500 000ISK (Icelandic Krona) and Blake put 700 000ISK into savings accounts
at different banks.
After 8 years, Ivan and Blake have the same amount of money in their accounts.
They both receive interest compounded quarterly and Blake has an annual interest rate
that is half of Ivan's annual interest rate.
Work out the annual interest rate that Blake receives.

Answers

Answer 1

Using compound interest, it is found that Blake receives an annual rate of 4.27%.

Compound interest:

[tex]A(t) = P\left(1 + \frac{r}{n}\right)^{nt}[/tex]

A(t) is the amount of money after t years.  P is the principal(the initial sum of money).  r is the interest rate(as a decimal value).  n is the number of times that interest is compounded per year.  t is the time in years for which the money is invested or borrowed.

Ivan's parameters are given by:

Put 500 000 ISK, hence [tex]P = 500000[/tex]8 years, hence [tex]t = 8[/tex]Quarterly compounding, hence [tex]n = 4[/tex]Interest rate of r.

Hence:

[tex]A_i(t) = P\left(1 + \frac{r}{n}\right)^{nt}[/tex]

[tex]A_i(t) = 500000\left(1 + \frac{r}{4}\right)^{32}[/tex]

[tex]A_i(t) = 500000(1 + 0.25r)^{32}[/tex]

Blake's parameters are given by:

Put 700 000 ISK, hence [tex]P = 700000[/tex]8 years, hence [tex]t = 8[/tex]Quarterly compounding, hence [tex]n = 4[/tex]Interest rate that is half of Ivan's, hence [tex]\frac{r}{2}[/tex]

Thus:

[tex]A_b(t) = P\left(1 + \frac{r}{n}\right)^{nt}[/tex]

[tex]A_b(t) = 700000(1 + 0.125r)^{32}[/tex]

These amounts are equal, hence:

[tex]A_i(t) = A_b(t)[/tex]

[tex]500000(1 + 0.25r)^{32} = 700000(1 + 0.125r)^{32}[/tex]

[tex]\left(\frac{1 + 0.25r}{1 + 0.125r}\right)^{32} = \frac{700000}{500000}[/tex]

[tex]\left(\frac{1 + 0.25r}{1 + 0.125r}\right)^{32} = \frac{7}{5}[/tex]

[tex]\sqrt[32]{\left(\frac{1 + 0.25r}{1 + 0.125r}\right)^{32}} = \sqrt[32]{\frac{7}{5}}[/tex]

[tex]\frac{1 + 0.25r}{1 + 0.125r} = \left(\frac{7}{5}\right)^{\frac{1}{32}}[/tex]

[tex]\frac{1 + 0.25r}{1 + 0.125r} = 1.01057023172 [/tex]

[tex]1 + 0.25r = 1.01057023172 + 0.12632127896r[/tex]

[tex]0.12367872103r = 0.01057023172 [/tex]

[tex]r = \frac{0.01057023172}{0.12367872103}[/tex]

[tex]r = 0.0854[/tex]

Blake's rate is:

[tex]\frac{r}{2} = \frac{0.0855}{2} = 0.0427[/tex]

Blake receives an annual rate of 4.27%.

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Answers

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Answers

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Answers

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