# Exercise-1 (Computation of simple and compound interest)

A company is considering to start a new product line. The new product line requires the installation of new machines and equipment. For this purpose, company wants to borrow money by issuing bonds of \$10,000 for 12-year period. The interest on these bonds is to be paid at a rate of 8% per year.

Required:

Compute the amount of interest to be paid to bondholders over 12-year period:

1. if the simple interest is charged.
2. if the interest is compounded annually.

## Solution:

### (1) If interest is simple:

I = Pin

= \$10,000 × 8% × 12

= \$10,000 × 0.08 × 12

= \$9,600

### (2) If interest is compounded annually:

To compute compound interest for 12-year period, we would compute compound amount first using compound amount formula and then compute compound interest by deducting the principal amount from compound amount.

S = P(1 + i)n

= \$10,000 × (1 + 8%)12

=\$10,000 × 2.518*

= \$25,180

Interest to be earned over 12-year period: \$25,180 – \$10,000 = \$15,180

*Value of (1 + 8%)12 from future value of \$1 table: 12 periods; 8% interest rate.

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### 2 Comments on Exercise-1 (Computation of simple and compound interest)

1. Abbas

Very Informative Post. Well Done

2. munyentwari emmanuel

so splendid!!! greatest help