Part I-A

1) $5,942.70

2) $57.30

3) %0.9642

4) At first glance, it doesn’t make any sense to as of why the percent interest
earned is slightly below the 1% nominal APR. That is because the percent of
interest earned is the effective rate (Effective APR). You must take two things into
consideration; compounding interest, and if the periods are at the beginning or end
of each month.

Since our periods are at the end of each month, we have only collected
interest on 23 out of the 24 deposits. So, we have collected $57.30 of interest on
$5,695.09. Then once you add the total interest, the first 23 deposits we got interest
on, and the last deposit you get to the final goal of $6000.

Although, it might still be confusing that $57.30 out of $5,695.09 is now

very slightly above the 1% APR. This is because of compounding interest (earning
interest on your interest). Without compounding interest; the total interested earned
would always be exactly 1% of the total amount deposited!

The percent of the amount deposited that is interested earned will continue
to go up in an exponential fashion under compounding interest; depending on the
number of years and the number of payments per year. This process will go on
indefinitely, or until the number of periods (years/ number of payments/ etc..) have
expired.
Part I-B

1) $48,914.68

2) $1085.32

3) %2.2188

4) Just like in “Part I-A”, the reason why the total percent of interest earned
is higher than the nominal APR is because of whether the period was at the
beginning or end of each month and how much compounding interest there was.

In this case there was higher APR and a longer time frame for the compounding
interest. So, it is no wonder that the total percent of interest earned; also known as
the effective rate (effective APR) is higher than the nominal APR in this case.

5) Question 4 in “Part I-A & Part I-B” are essentially the same. They are
both looking for the percent of the amount deposited that is the interest earned. The
actual percent depends on several factors such as: when are the deposits made
every month (beginning or end), what the nominal APR is, and how long the time
frame is for the compounding interest to take effect. And since “Part I-B” had a
longer time frame and a higher nominal APR, it would explain why there was a
higher effective rate in question #3 then there was nominal APR to begin with.

Part II-A

1) $34,000
2) $1,980.18
3) $35,980.18
4) %5.5035
Part II-B

1) $200,000

2) $133,443.23

3) $333,443.23

4) %40.0198

5) The total amount of interest for the house was roughly 8 times as much
compared to the truck. And the house had an APR that was only %1.5 higher then
the truck. Goes to show that the length of the loan along with compounding interest
can significantly increase how much you pay/receive in total interest.

Part III

This project has helped us to learn and understand about future and present
value in many ways. We knew how the concept worked in general, but this project
really helped us to get a far better and deeper understanding of how the time value
of money works with payments and compounding interest. For example, we never
noticed just how much compounding interest affected the amount deposited that is
interest earned; also known as the effective rate.

We believe that the results would change considerably if the parameters such
as “number of years” and “number of payments per year” were to change. Because
this would affect not only how much is paid per month, but how much of total
interest would be either earned or paid out, and what the effective rate would be.

We could use this work and many others like it to help me improve on
financial and mathematical concepts. It is one thing to have the formula of
something, but if you don’t completely understand how everything works behind
the scenes you will never be able to fully apply it. Overall it was a very insightful
project that shows what happens behind the scenes of a graphing calculator or a
finance app on the computer when determining the future value of money!