# 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:

- if the simple interest is charged.
- 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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