67 CHAPTER 4: MANAGING MONEY

UNIT 4A: TAKING CONTROL OF YOUR FINANCES 67

Using and Understanding Mathematics

6th Edition Bennett Solutions Manual
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UNIT 4A
TIME OUT TO THINK 9. b. Each week, you use about 22 gallons of gas,
Pg. 189. Answers will vary. This would be a good because (400 mi)/(18 mi/gal) ≈ 22 gal. With gas
topic for a discussion either during or outside of at $4/gal, this comes to $88/week, or $4576/year.
class. A car that gets 50 mi/gal will use about one-third
of the gas used by your old car (because 50 is
Pg. 192. Answers will vary, but considerations could
almost three times as large as 18), which means it
include ways to free up time to study other than
will cost about $1500/year for gas. The difference
cutting back on work hours, the need to take out
between these two values is the amount you save,
student loans, and future estimates of earnings
around $3000.
based on completing a college degree. This would
be a good topic for a discussion either during or 10. b. You earn about $12,000 more with a bachelor’s
outside of class. degree, which is just over $350,000 in earnings in
30 years.

QUICK QUIZ
1. a. Evaluating your budget allows you to look
critically at your cash flow, which affects personal
spending.
2. a. Your cash flow is determined by the amount of
money you earn (income), and the amount you
spend.
3. b. If your cash flow is negative, you are spending
more than you take in.
4. c. You should prorate all once-per-year expenses
and include them in your monthly budget.
5. b. Housing typically costs about one-third of your
income.
6. c. As a percentage of income, health care expenses
are not too alarming, though they grow rapidly as
one ages.
7. a. You can’t save without money left over at the end
of the month, which corresponds to a positive cash
flow.
8. c. Trey spends about $8 per day on cigarettes,
which comes close to $250 per month.

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68 CHAPTER 4: MANAGING MONEY
UNIT 4A: TAKING CONTROL OF YOUR FINANCES 68

DOES IT MAKE SENSE?

7. Does not make sense. All the smaller expenses do
add up, and they have a significant influence on
your budget.
8. Makes sense. If you have a negative monthly cash
flow, your debt will rise.
9. Makes sense. When prorated as a per-month
expense, an $1800 vacation costs $150 per month.
10. Makes sense. Cash flow is determined by income
and spending, and one way to turn a negative cash
flow into a positive cash flow (other factors being
equal) is to earn more money.
11. Does not make sense. Divide $15,000 by 365
(days per year) to find that an annual expense of
$15,000 comes to $41 per day. Pizza and a soda
do not cost that much.
12. Does not make sense. You generally get what you
pay for, and cheap insurance usually goes hand-in-
hand with minimal benefits and hidden costs.

BASIC SKILLS AND CONCEPTS

13. Maria spends $20 each week on coffee, and using
52 weeks per year, this comes to $1040 per year.
She spends $130 each month on food, which is
$1560 per year. The amount she spends on coffee
is $1040/$1560 = 67% of the amount she spends
on food.
14. Jeremy spends $6 each week on the newspaper,
which comes to $312 per year. He spends $20 per
week, or $1040 per year on gas. The amount he
spends on the New York Times is $312/$1040 =
30% of the amount he spends on gas.
15. Suzanne spends $85 per month for her cell phone
usage, which is $1020 per year. This is
$1020/$200 = 510% of the amount she spends on
health insurance.
16. Homer spends $10 per week on lottery tickets,
which comes to $520 per year. He spends $400 each
month on rent, or $4800 per year. The amount
he spends on lottery tickets is $520/$4800
= 11% of the amount he spends on rent.
17. Sheryl spends $9 each week on cigarettes, which
comes to $468 per year. She spends $30 each month
on dry cleaning, or $360 per year. The amount
she spends on cigarettes is $468/$360 =
130% of the amount she spends on dry cleaning.

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69 CHAPTER 4: MANAGING MONEY
UNIT 4A: TAKING CONTROL OF YOUR FINANCES 69

18. Ted spends $60 every two weeks on concert 31. Income = $600 × 12 + $400 × 12 + $5000 =
tickets, which is $30 per week. Using 52 weeks $17,000 per year. Expenses = $450 × 12 +
per year, he spends $1560 per year on tickets, $50 × 48 + $3000 × 2 + $100 × 48 = $18,600 per
which is $1560/$500 = 312% of the amount he year. Thus annual cash flow is $17,000 – $18,600
spends on car insurance. = –$1600, and monthly cash flow is –$1600/12 =
19. Vern spends $21 per week on beer, which amounts –$133.
to $1092 per year. This is $1092/$700 = 156% of 32. Income = $1200 × 12 + $7000 + $8000 = $29,400
the amount he spends on textbooks. per year. Expenses = $600 × 12 + $70 × 48 +
$7500 + $40 × 12 + $200 × 12 + $65 × 12 =
20. Sandy spends $35 every two weeks, which is $21,720 per year. Thus annual cash flow is
$17.50 every week on gas. This comes to $910 per
$29,400 – $21,720 = $7680, and monthly cash
year. She spends $60 per month, or $720 per year
flow is $7680/12 = $640.
for her TV/Internet services. The amount she
spends on gas is $910/$720 = 126% of the amount 33. Income = $2300 × 12 = $27,600. Expenses =
she spends on TV/Internet services. $800 × 12 + $90 × 48 + $125 × 12 + $360 × 2 +
21. Since 18%/12 = 1.5%, you spend 1.5% of $650 on $400 × 2 + $25 × 48 + $400 × 12 + $85 × 12 =
interest each month, which is 0.015 × $650 = $23,960. Thus annual cash flow is $27,600 –
$9.75. Over the span of a year, you’ll spend $117 $23,960 = $3640, and monthly cash flow is
on interest. $3640/12 = $303.
22. Since 21%/12 = 1.75%, Brooke spends 1.75% of 34. Income = $32,000 + $200 × 12 = $34,400 per
$900, or 0.0175 × $900 = $15.75 on interest each year. Expenses = $700 × 12 + $150 × 48 +
month. Over the course of a year, she’ll spend $450 × 12 + $150 × 12 + $500 × 2 + $200 × 12 +
$189 on interest. $600 + $800 × 12 = $36,400. Thus annual cash
flow is $34,400 – $36,400 = –$2000, and monthly
23. Vic’s balance is $2200 – $300 = $1900. He spends cash flow is –$2000/12 = –$167.
3% of $1900, or 0.03 × $1900 = $57 each month
on interest. This comes to $684 per year. 35. The woman spends $900/$3200 = 28% of her
income on rent (i.e. housing), which is below
24. Deanna pays 9% of $700, or 0.09 × $700 = $63 on average.
interest each month. Over the course of a year,
she’ll spend $756 on interest. 36. The couple spends $400/$3500 = 11% on
entertainment, which is above average.
25. Sara spends $6000 per semester, or $12,000 per
year, which is $12,000/12 = $1000 per month. 37. The man spends $200/$3600 = 5.6% on health
care, which is about average.
26. Jake spends $600 × 15 = $9000 for 15 credit-hours
each quarter, and $350 for books, which comes to 38. The couple earns $45,500/12 = $3792 per month,
$9350 each quarter, or $28,050 per year. Thus his and spends $700/$3792 = 18% on transportation,
monthly cost is $28,050 /12 = $2337.50 per which is slightly below average.
month. 39. The couple spends $600/$4200 = 14% on health
27. Lan spends $650 × 2 = $1300 per year on care, which is above average.
automobile insurance, $125 × 12 = $1500 per year 40. The family earns $48,000/12 = $4000 per month,
for health insurance, and $400 per year on life and spends $1500/$4000 = 37.5% on housing,
insurance. The total cost is $3200, which means he which is above average.
spends $3200/12 = $266.67 per month. 41. The cost of using the old car is computed below.
28. Each year, Juan spends $500 × 12 = $6000 on rent, Gas:
$800 × 2 = $1600 on insurance, and $900 at the 250 mi 1 gal $3.50 52 wk
health club, for a total of $8500 per year. His × × × × 5 yr = $10,833 .
monthly cost is $8500/12 = $708.33. wk 21 mi 1 gal yr
29. Raul spends $200 + $245 + $100 + $300 = $845 $400
Insurance: × 5 yr = $2000 .
each year on these contributions, or $845/12 = yr
$70.42 per month.
30. Using 52 weeks per year, Randy spends $25 × 52 Repairs: $75, 000 = Pe0.045×35 .
+ $45 × 4 = $1480 on these expenses each year. Total: $10,833 + $2000 + $7500 = $20,333.
That’s $1480/12 = $123.33 per month.

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70 CHAPTER 4: MANAGING MONEY
UNIT 4A: TAKING CONTROL OF YOUR FINANCES 70

41. (continued) 50. A man earns approximately

The cost for using the new car is computed below. $119, 474 −$80,718
= 48% more than a woman
Gas: $80,718

250 mi 1 gal $3.50 52 wk in a year. Over 40 years, a man will earn

× × × × 5 yr = $5056 .
wk 45 mi 1 gal yr ($119, 474 − $80,718) × 40 = $1,550, 240 more.

$800 51. If you take the course, you will spend $1500, and
Insurance: × 5 yr = $4000 . use 150 hours of time that could be used to earn
yr money in a job. If you work those 150 hours, you
Purchase Price: $16,000. will earn $1500. Therefore, the net cost will be
Total: $5056 + $4000 + $16,000 = $25, 056. $1500 + $1500 = $3000.
Using the old car is less expensive, but not by a 52. If you take the part-time job, you will earn
large factor. After five years, if you use the old $15 × 20 = $300 per week, though you will spend
car, you’ll have a junky car, whereas if you bought $150 on entertainment, which comes to a net
the new car, you’d have a nice car after five years. benefit of $150 per week. If you take the full-time
job, you will earn $12 × 40 = $480 per week. If
42. Over five years, the old car would cost $18,200 for
finances are the only consideration, the full-time job
gas, $3000 for insurance, and $6000 for repairs,
is the better choice. The net benefit of the full- time
for a total of $27,200. The new car would cost
job is $480 – $150 = $330/week
$5460 for gas, $4000 for insurance, and $12,000
to buy it, for a total of $21,460. (See details in
Exercise 41, which is identical except for the FURTHER APPLICATIONS
numbers used). Using the new car is less
expensive over five years. 53. Note that it costs $10 less per month to operate the
new dryer, and thus in 62 months, you would have
43. If you buy the car for $22,000, and sell it three saved $620, which is long enough to pay for the new
years later for $10,000, you will have spent dryer.
$12,000. If you lease the car for three years (36
months) you will spend $1000 + $250 × 36 = 54. The cost for installing the solar system is
$10,000. It is cheaper to lease in this case. $18,400 × (100% – 40%) = $11,040. It would take
$11, 040
44. If you buy the car for $22,000, and sell it four approximately = 130 months or
years later for $8000, you will have spent $14,000. $85 / month
If you lease the car for four years ($48 months), 1 yr
130 months × = 10.8 years .
you will spend $1000 + $300 × 48 = $15,400. It is 12 months
cheaper to buy the car in this case. 55. a. If you didn’t have the policy, you’d pay all of
45. At the in-state college, you will spend $4000 + the costs of the claims, which is $450 + $925 =
$700 × 12 = $12,400 each year. At the out-of-state $1375. If you did have the policy, you’d pay two
college, you will spend $6500 + $450 × 12 = years of premiums (2 × $550 = $1100), all of the
$11,900. It will cost less out-of-state. $450 claim, and $500 of the $925 claim, for a
46. If you go to Concord, you will spend $3000 + grand total of $2050.
$800 × 12 = $12,600. If you go to Versalia, you b. Without the insurance policy, your cost would
will spend $16,000 – $10,000 + $350 × 12 + be $450 + $1200 = $1650. With the policy, you’d
$2000 = $12,200. It is cheaper to attend Versalia. pay premiums for two years, and $200 on each
47. He will earn ($66,196 − $40, 447 ) × 40 claim for a total of 2 × $650 + 2 × $200 = $1700.
= $1, 029,960 more. c. Without the policy, your cost would be $200 +
$1500 = $1700. With the policy, you’d pay
48. She will earn ($49,108 − $80, 718) × 40 premiums for two years, $200 for the first claim, and
= −$1, 264, 400 , or $1,264,400 less. $1000 for the second claim, for a total of
2 × $300 + $200 + $1000 = $1800.
49. A man earns approximately

$66,196 −$49,108 $49,108

= 35%

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71 CHAPTER 4: MANAGING MONEY
UNIT 4A: TAKING CONTROL OF YOUR FINANCES 71

more than a woman in

a year. Over 40 years, a man will earn
($66,196 − $49,108) × 40 = $683,520 more.

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72 CHAPTER 4: MANAGING MONEY
UNIT 4A: TAKING CONTROL OF YOUR FINANCES 72

56. Under Plan A, you’ll pay $1000 for the down 58. a. You’ll pay $25 for each office visit, $400 for
payment, $400 for each of 24 months (two years), the January 23rd trip to the emergency room, $500
and $10,000 for the residual, which totals to $1000 for the September 23rd trip to the emergency
+ $400 × 24 + $10,000 = $20,600. Under Plan B, room, $1400 for the April 13th surgery, $5000 for
the cost will be $500 + $250 × 36 + $9500 = the June 14th surgery, and one year of premiums,
$19,000. Under Plan C, the cost will be $175 × 48 for a grand total of $25 × 2 + $400 + $500 +
+ $8000 = $16,400, and this is the least expensive $1400 + $5000 + $300 × 12 = $10,950.
plan.
b. You’ll pay $25 for each office visit, $200 for each
57. a. You’ll pay $25 for each of the office visits, trip to the emergency room, $1400 for the April
$200 for each trip to the emergency room, and 13th surgery, $1500 for the June 14th surgery, and
$1000 for the surgery, plus one year of premiums, one year of premiums, for a grand total of $25 ×
for a grand total of $25 × 3 + $200 × 2 + $1000 + 2 + $200 × 2 + $1400 + $1500 +
$350 × 12 = $5675. $700 × 12 = $11,750.
b. If you did not have the insurance policy, your cost c. With no insurance, you would pay all of the
is the total of the numbers in the second column, costs listed in the table out-of-pocket, for a total of
which is $8220. $10,700. This is cheaper than both Plan A and
Plan B, though going without health insurance is
very risky: if you have a huge expense (such as
extensive care while recovering from a car wreck),
you have to pay all of it.
59. – 62. Answers will vary.

UNIT 4B
TIME OUT TO THINK QUICK QUIZ
Pg. 204. Looking at figure 4.3, students could guess 1. b. Compound interest always yields a greater balance
that the value at 3% would be closer to the value at than simple interest when the APR is the same.
2% since the graph at 4% rises more quickly. At
2. a. If you begin with a principle P, and add 5% to
3%, the value would be
its value after one year, the result is P + 0.05P =
$224 × (1.03)
535
≈ 1.65 ×109 . At 6%, the value 1.05P, which means the principle increases by a

would be $224 × (1.06 )

535
≈ 7.74 ×1015 . Small factor of 1.05 each year.

increases in the interest rate will cause large changes 3. c. The compound interest formula states
in the accumulated value since, over 535 years, the
A = P × (1+ APR ) . With an APR of 6.6%, the
Y
value at the end of each year will be larger.
balance after five years would be A = P × (1 +
Pg. 206. With n = 1, we get back the formula for
0.066)5, which means the account increases in
compounding once a year. This should be the case value by a factor of 1.0665.
because annual compounding means n = 1.
4. a. The APR of 4% is divided evenly into four parts
Pg. 209. It is important that students can locate the ex so that each quarter (three months), the account
key on their calculator and become acquainted
increases in value by 4%/4 = 1%.
with the value of e. For some calculators ex is the
inverse of the LN (natural log) key. 5. c. Compounding interest more often always results
Pg. 211. Even though the annual interest rates may in a greater annual percentage yield.
not be constant, they will usually be close to the 6. b. The APY is the same as the APR with annual
average annual interest rate, which can be used to compounding, but it’s larger in all other cases.
make financial decisions. You may have a choice 7. a. After 20 years, the account earning 4% APR
of investments with different expected average will have grown by a factor of 1.0420 = 2.19,
returns (and different levels of risk). The whereas the account earning 2% APR will have
comparison may therefore still help you decide grown by a factor of 1.0220 = 1.49. Thus the 4%
which type of investment is best for you, given the APR account will have earned about one and a
amount you have to deposit. half times as much interest.

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71 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 71

8. a. The continuously compounded interest formula 1 1 1

64−1/ 3 = = =
21.
reads A = P × e(APR×Y ) , and thus after two years, 641/ 3 3
64 4

the balance is A = $500 × e(0.06×2) = $500 × e0.12 . 22. 23 × 25 = 23+5 = 28 = 256

9. a. The compound interest formula assumes a
constant APR for as many years as you have your 23. 34 ÷ 32 = 34−2 = 32 = 9
money invested in an account. 24. 6 2 × 6 −2 = 62+(−2) = 60 = 1
10. c. Bank accounts that earn compound interest
grow by larger amounts as time goes by, and this 25. 251/ 2 ÷ 25−1/ 2 = 251/ 2−(−1/ 2) = 251 = 25
is a hallmark of exponential growth. 26. 33 + 23 = 27 + 8 = 35
27. x = 12 (Add 3 to both sides.)
DOES IT MAKE SENSE? 28. y = 3 (Subtract 4 from both sides.)
9. Does not make sense. You earn more interest 29. z = 16 (Add 10 to both sides.)
under compound interest when the APR is the same.
30. x = 4 (Divide both sides by 2.)
10. Makes sense. The APY is a function of both the
31. p = 4 (Divide both sides by 3.)
APR and the number of compounding periods. If
one bank had more compounding periods than the 32. y = 4 (Subtract 2, and divide both sides by 4.)
other, its APY would be greater. 33. z = 4 (Add 1, and divide both sides by 5.)
11. Does not make sense. A bank with an APR of 34. y = –2 (Subtract 1, and divide both sides by –6.)
5.9% compounded daily is a better deal than a 35. 3x – 4 = 2x + 6 ⇒ 3x = 2x +10 ⇒ x = 10
bank with 6% APR compounded annually (all
other things being equal) because the APY in the 36. 5 – 4s = 6s – 5 ⇒ 10 – 4s = 6s ⇒ 10 = 10s ⇒ s = 1
first case is greater. 37. 3a + 4 = 6 + 4a ⇒ 3a – 2 = 4a ⇒ a = –2
12. Does not make sense. There is a diminishing 38. 3n – 16 = 53 ⇒ 3n = 69 ⇒ n = 23
return when banks offer to compound interest 39. 6q – 20 = 60 + 4q ⇒ 6q = 80 + 4q ⇒ 2q = 80
more often, and even under the situation where a ⇒ q = 40
bank compounds interest continuously (i.e. more 40. 5w – 5 = 3w – 25 ⇒ 5w = 3w – 20 ⇒ 2w = –20
often than every trillionth of a second), the APY has ⇒ w = –10
a finite limit.
41. t/4 + 5 = 25 ⇒ t/4 = 20 ⇒ t = 80
13. Makes sense. One’s bank account grows based on
42. 2x/3 + 4 = 2x ⇒ 4 = 4x/3 ⇒ 4x = 12 ⇒ x = 3
the APY, and an APR of 5% could certainly result 43. x 2 = 25 ⇒ (x 2 )1/ 2 = 251/ 2 ⇒ x = 25 = 5
in an APY of 5.1% if the number of compounding
Another solution is x = –5.
periods per year was just right.

14. Makes sense. At 4% APR (compounded annually), 44. y 3 = 27 ⇒ ( y 3 )1/ 3 = 271/ 3 ⇒ y = 3 27 = 3

and over the span of twenty years, the value of an

( )
1/ 2
45. (x − 4) = 36 ⇒ (x − 4)
2 2
account will grow by a factor of 1.0420 = 2.19, = 361/ 2 ⇒
which is more than double the original amount.
x − 4 = 36 ⇒ x = 4 + 6 = 10 Another solution is
x = –2.
BASIC SKILLS AND CONCEPTS
3
p1/ 3 = 3 ⇒ p1/ 3 = 33 ⇒ p = 27
15. 23 = 2 × 2 × 2 = 8
46. ( )
1/ 2
(t / 3) 2 = 16 ⇒ (t / 3) 2 = 161/ 2 ⇒
16. 34 = 3 × 3 × 3 × 3 = 81 43 = 64
17.

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 72 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 72
()
47.

t / 3 = 16 ⇒ t = 3 × 4 = 12 Another solution is
−2 1 1 t = –12.
18. 3 = =
2 9
3 48. w2 + 2 = 27 ⇒ w2 = 25 ⇒ w = 25 = 5 Another
1/ 2
19. 16 = 16 = 4 solution is w = –5.

20. 811/ 2 = 81 = 9 49. u 9 = 512 ⇒ (u 9 )1/ 9 = 5121/ 9 ⇒ u = 9 512 = 2

50. v3 + 4 = 68 ⇒ v3 = 64 ⇒ v = 3 64 = 4

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73 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 73

51. You’ll earn 4% of $700, or 0.04 × $700 = $28, 61. A = $5000(1+ 0.031)12 = $7212.30
each year. After five years, you will have earned
5 × $28 = $140 in interest, so that your balance 62. A = $40, 000(1 + 0.028)30 = $91,591.13
will be $840.
4⋅10
52. Each year, you’ll earn 3% of $1200 = ⎛ 0.02 ⎞
63. A = $10, 000 ⎜1 + ⎟ = $12, 207.94

0.03 × $1200 = $36. After five years, you will ⎝ 4 ⎠

have earned 5 × $36 = $180 in interest, and your 365⋅5

balance will be $1380. ⎛ 0.03 ⎞

64. A = $2000 ⎜1 + ⎟ = $2323.65
53. Each year, you’ll earn 3.5% of $3200 = ⎝ 365 ⎠
0.035 × $3200 = $112. After five years, you will 365⋅5
⎛ 0.03 ⎞
have earned 5 × $112 = $560 in interest, and your 65. A = $25, 000 ⎜1 + ⎟ = $29, 045.68
balance will be $3760. ⎝ 365 ⎠

54. Each year, you’ll earn 3.8% of $1800 = ⎛ 0.0275 ⎞

12⋅5
0.038 × $1800 = $68.40. After five years, you will 66. A = $10, 000 ⎜1 + = $11, 472.21

⎝ 12
have earned 5 × $68.40 = $342 in interest, and
your balance will be $2142. 12⋅15
⎛ 0.05 ⎞
55. 67. A = $2000 ⎜1 + ⎟ = $4227.41
12
⎝ ⎠
Suzanne Derek
365⋅15
Year Interest Balance Interest Balance ⎛ 0.045 ⎞
68. A = $30, 000 ⎜1 + = $58,918.54
0 ----- $3000 ----- $3000
⎝ 365
1 $75 $3075 $75 $3075
4⋅30
2 $75 $3150 $77 $3152 ⎛ 0.037 ⎞
69. A = $25, 000 ⎜1 + = $75, 472.89
4 ⎟
3 $75 $3225 $79 $3231 ⎝ ⎠
4 $75 $3300 $81 $3311 12⋅15
⎛ 0.042 ⎞
70. A = $15, 000 ⎜1 + ⎟ = $28,133.20
5 $75 $3375 $83 $3394 ⎝ 12 ⎠

Suzanne’s balance increases by $375, or 12.5% of 71. The APY is the relative increase in the balance of
its original value. Derek’s increases by $394, or a bank account over the span of one year. The
13.1% of its original value. (Note on values shown easiest way to compute it when the APR is known
in the table: the balance in one year added to next is to find the one-year balance, compute the
year’s interest does not necessarily produce next relative increase, and express the answer as a
year’s balance due to rounding errors. Each value percent. When the principal is not given, any
shown is rounded correctly to the nearest cent). amount can be used – here, we will use $100.

365⋅1
56. ⎛ 0.031⎞
A = $100 ⎜1 +
365 ⎟
1-year balance: =
Ariel Travis
⎝ ⎠
Year Interest Balance Interest Balance $103.15. The relative increase is $3.15/$100 =
0 ----- $5000 ----- $5000 3.15%, so the APY is 3.15%.
1 $150 $5150 $150 $5150 72. See Exercise 71 for details. T he one-year balance
2 $150 $5300 $155 $5305 12⋅1 APY is 3.25%.
⎛ 0.032 ⎞
3 $150 $5450 $159 $5464 is A = $100 ⎜1 + ⎟
⎝ 12 ⎠
4 $150 $5600 $164 $5628
relative increase is $3.25/$1
5 $150 $5750 $169 $5797

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74 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 74

= $103.25. The 00 = 3.25%, so the

Ariel’s balance increases by $750, or 15% of its 73. See Exercise 71 for details. The one-year balance
original value. Travis’ increases by $797, or 12⋅1
A = $100 ⎜1 +⎛
15.9% of its original value. 0.0123 ⎞
is ⎟ = $101.24 . The
⎝ 12 ⎠
57. A = $10, 000(1 + 0.04)10 = $14,802.44
relative increase (APY) is $1.24/$100 = 1.24%.
58. A = $10, 000(1 + 0.025)20 = $16,386.16 74. See Exercise 71 for details. The one-year balance
4⋅1
59. A = $15, 000(1+ 0.032)25 = $32,967.32 ⎛ 0.0225 ⎞
is A = $100 ⎜1 + ⎟ = $102.27 . The
12
60. A = $3000(1 + 0.018) = $3716.16 ⎝ 4 ⎠
relative increase (APY) is $2.27/$100 = 2.27%.

Copyright © 2015 Pearson Education, Inc.

75 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 75

75. The one, five, and twenty-year balances are: 80. The one, five, and twenty-year balances are:
0.035×1
One year: A = $10, 000e = $10,356.20 . One year: A = $500e0.027×1 = $513.68 .

Five years: A = $10, 000e0.035×5 = $11,912.46 . Five years: A = $500e0.027×5 = $572.27 .

Twenty years: A = $10, 000e0.035×20 = Twenty years: A = $500e0.027×20 = $858.00 .

$20,137.53 . To compute the APY, find the relative increase in

the balance of the account after one year.
To compute the APY, find the relative increase in
the balance of the account after one year. APY = $13.68/$500 = 2.74%.

APY = $356.20/$10,000 = 3.56%. 81. Solve $25, 000 = P(1+ 0.05)8 for P to find
76. The one, five, and twenty-year balances are: $25, 000
P= = $16,920.98 .
One year: A = $2000e0.031×1 = $2062.97 . (1 + 0.05)8

Five years: A = $2000e0.031×5 = $2335.32 . ⎛ 0.045 ⎞

4⋅8
82. Solve $25, 000 = P ⎜1 + ⎟ for P to find
Twenty years: A = $2000e 0.031×20
= $3717.86 . ⎝ 4 ⎠

$25, 000
To compute the APY, find the relative increase in P= 4⋅8
= $17, 477.00 .
the balance of the account after one year. ⎛ 0.045 ⎞
⎜⎝1 +
APY = $62.97/$2000 = 3.15%. 4
77. The one, five, and twenty-year balances are:
⎛ 0.06 ⎞12⋅8

One year: A = $7000e0.045×1 = $7322.20 . 83. Solve $25, 000 = P ⎜1 + ⎟ for P to find
12
⎝ ⎠
Five years: A = $7000e0.045×5 = $8766.26 . $25, 000
P= 12⋅8
= $15, 488.10 .
0.045×20 0.06
Twenty years: A = $7000e = $17, 217.22 . 1+

To compute the APY, find the relative increase in ⎛ ⎞

⎜⎝ ⎟
the balance of the account after one year. 12 ⎠ 365⋅8
⎛ 0.04 ⎞
84. Solve $25, 000 = P ⎜⎝1 + ⎠
⎟ for P to find
APY = $322.20/$7000 = 4.60%. 365

78. The one, five, and twenty-year balances are: $25, 000
P= = $18,154.04 .
0.075×1
One year: A = $3000e = $3233.65 . ⎛ 0.04 ⎞
365⋅8
⎜1 + ⎟
⎝ 365 ⎠
Five years: A = $3000e0.075×5 = $4364.97 .
365⋅15
⎛ 0.04 ⎞
Twenty years: A = $3000e0.075×20 = $13, 445.07 . 85. Solve $120, 000 = P 1 + for P to find

To compute the APY, find the relative increase in 365

the balance of the account after one year. $120, 000

P= = $65,859.56 .

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76 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 76

365⋅15
APY = $233.65/$3000 = 7.79%. ⎛ 0.04 ⎞
⎜⎝1 + ⎟
79. The one, five, and twenty-year balances are: 365 ⎠
One year: A = $3000e0.06×1 = $3185.51 . ⎛ 0.055 ⎞
365⋅15

86. Solve $120, 000 = P ⎜1 + ⎟ for P to find

Five years: A = $3000e0.06×5 = $4049.58 . ⎝ 365 ⎠

$120, 000
Twenty years: A = $3000e0.06×20 = $9960.35 . P= = $52,591.47 .
365⋅15

To compute the APY, find the relative increase in ⎛1 + 0.055 ⎞

⎜ ⎟
the balance of the account after one year. ⎝ 365 ⎠
APY = $185.51/$3000 = 6.18%. 4⋅15
⎛ 0.028 ⎞
87. Solve $120, 000 = P ⎜1 + ⎟⎠ for P to find
⎝ 4

$120, 000
P= 4⋅15
= $78,961.07 .
⎛ 0.028 ⎞
⎜1 + ⎟
⎝ 4 ⎠

Copyright © 2015 Pearson Education, Inc.

77 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 77

12⋅15 One-year balance, compounded monthly:

⎛ 0.035 ⎞
88. Solve $120, 000 = P ⎜1 + for P to find
⎝ 12 ⎛ 0.05 ⎞
12⋅1
A = $100 1 + ⎟⎠ = $105.12 .
⎜⎝

$120, 000 12
P= 12⋅15 = $71, 040.91.
⎛ 0.035 ⎞ APY = $5.12/$100 = 5.12%.
⎜1 +
⎝ 12 One-year balance, compounded daily:

365⋅1
⎛ 0.05 ⎞
A = $100 ⎜1 + = $105.13 .
FURTHER APPLICATIONS ⎝ 365

89. After 10 years, Chang has $705.30; after 30 years, APY = $5.13/$100 = 5.13%.
he has $1403.40. After 10 years, Kio has $722.52;
As the number of compounding periods per year
after 30 years, she has $1508.74. Kio has $17.22,
increases, so does the APY, though the rate at
or 2.4% more than Chang after 10 years. She has
which it increases slows down.
$105.34, or 7.5% more than Chang after 30 years.
93. Account 1 Account 2
90. After 10 years, José has $2586.61; after 30 years,
he has $7691.46. After 10 years, Marta has Year Interest Balance Interest Balance
$2611.21; after 30 years, she has $7912.99. Marta 0 ----- $1000 ----- $1000
has $24.60, or 0.95% more than José after 10 1 $55 $1055 $57 $1057
years. She has $221.53, or 2.9% more than José 2 $58 $1113 $59 $1116
after 30 years.
3 $61 $1174 $63 $1179
To compute the APY, find the one-year balance in
91.
the account, using any principal desired ($100 is 4 $65 $1239 $67 $1246
used here), and then compute the relative increase 5 $68 $1307 $70 $1317
in the value of the account over one year. 6 $72 $1379 $74 $1391
One-year balance, compounded quarterly: 7 $76 $1455 $79 $1470

4⋅1
⎛ 0.066 ⎞
A = $100 ⎜1 + ⎟ = $106.77 .
8 $80 $1535 $83 $1553
⎝ 4 ⎠ 9 $84 $1619 $87 $1640
APY = $6.77/$100 = 6.77%. 10 $89 $1708 $93 $1733
One-year balance, compounded monthly: Account 1 has increased in value by $708, or
70.8%. Account 2 has increased by $733, or
12⋅1
⎛ 0.066 ⎞ 73.3%. (Note on values shown in the table: the
A = $100 ⎜1 + ⎟ = $106.80 .
⎝ 12 ⎠ balance in one year added to next year’s interest

does not necessarily produce next year’s balance

APY = $6.80/$100 = 6.80%.
due to rounding errors. Each value shown is
One-year balance, compounded daily: rounded correctly to the nearest dollar).
365⋅1
⎛ 0.066 ⎞ 94. a. If there is only one compounding period during
A = $100 ⎜1 + ⎟ = $106.82 . the year, the balance will increase by the APR in
⎝ 365 ⎠
As the number of compounding periods per
APY = $6.82/$100 = 6.82%.
year increases, so does the APY, though the
rate at which it increases slows down.

Copyright © 2015 Pearson Education, Inc.

78 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 78

92. To compute the APY, find the one-year balance in one year. Thus, the APY is the APR.
the account, using any principal desired ($100 is b. With more than one compounding per year, the
used here), and then compute the relative increase APY is always greater than the APR. The APY
in the value of the account over one year. reflects the cumulative effects of several
One-year balance, compounded quarterly: compounding periods during the year. At the end
of the year, the balance will be greater than if there
had been only one compounding period.
c. APY does not depend on the starting principal.
It gives the relative increase (as a percent) in the
balance.
4⋅1 d. The more compounding periods per year, the
⎛ 0.05 ⎞
A = $100 ⎜1 + ⎟ = $105.09 . greater the APY.
⎝ 4 ⎠
APY = $5.09/$100 = 5.09%.

Copyright © 2015 Pearson Education, Inc.

79 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 79

95. a. After 5 years, Rosa has $3000 (1.04 )

5 log 3 = t log(1.08). Now divide both sides by
=
log 1.08 to arrive at the answer:
$3649.96; after 20 years, she has $3000 (1.04 )
20
= t = (log 3)/(log 1.08) = 14.3 years. Thus it will
take about 14.3 years for your investment to triple
$6573.37. Julian has $2500 (1.05)
5
= $3190.70 in value. Another way to come to the solution is to

after 5 years, and he has $2500 (1.05)

20
= try various values of t in (1.08)t – you will have
$6633.24 after 20 years. found a solution when (1.08)t is about 3.

b. For Rosa, ($3649.96 – $3000.00)/$3649.96 =

100. See Exercise 99. Solve 1.5P = P(1.07)t for t to
18% of the balance after 5 years is interest and
($6573.37 – $3000.00)/$6573.37 = 54% of the arrive at t = (log 1.5)/(log 1.07) = 6.0 years.

balance after 20 years is interest. For Julian, 101. See Exercise 99. Solve $100, 000 = $1000(1.07)t
($3190.70 – $2500.00)/$3190.70 = 22% of the
for t. Begin by dividing both sides by $1000; this
balance after 5 years is interest and ($6633.24 –
$2500.00)/$6633.24 = 62% of the balance after 20 yields 100 = (1.07)t . Now take the logarithm of
years is interest. both sides, and apply a property of logarithms to
c. The longer the investment time, the higher the get log 100 = t log 1.07. Divide both sides by log
overall returns. 1.07 to find t = (log 100)/(log 1.07) = 68.1 years.

Trial and error may also produce the same result if

96. a. After 5 years, Paula has $4000e0.048×5 = you are patient.

$5085.00; after 20 years, she has $4000e0.048×20 = 102. a.

$10,446.79. Petra has $3600e0.056×5 = $4763.27 n 1 4 12 365 500 1000

after 5 years, and she has $3600e0.056×20 = APY 12.00 12.55 12.68 12.75 12.75 12.75
$11,033.48 after 20 years. b. The one-year balance (using P = $100) is

b. For Paula, ($5085.00 – $4000.00)/$5085.00 = A = $100e0.12×1 = $112.75 , and thus the APY is
21% of the balance after 5 years is interest and $12.75/$100 = 12.75%.
($10,446.79 – $4000.00)/$10,446.79 = 62% of the
balance after 20 years is interest. For Petra, c.
($4763.27 – $3600.00)/$4763.27 = 24% of the
balance after 5 years is interest and ($11,033.48 –
$3600.00)/$11,033.48 = 67% of the balance after
20 years is interest.
c. The longer the investment time, the higher the
overall return.

97. For Plan A, solve $120, 000 = P(1.05)30 for P to

$120, 000
find P = = $27, 765.29 .
(1.05)30

For Plan B, solve $120, 000 = Pe0.048×30 for P to

$120, 000 d. The APY is higher with continuous

find P = = $28, 431.33.
e0.048×30 compounding than with any other periodic

Copyright © 2015 Pearson Education, Inc.

80 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 80

compounding.
98. Answers will vary.
e. At the end of one year, you will
99. To obtain an exact solution for this problem, one
0.12×1
must use logarithms (studied in a later chapter). If have A = $500e = $563.75 . After five years,

your initial investment P is to triple, we must you will have A = $500e0.12×5 = $911.06 .

solve 3P = P(1.08)t for t in order to find out how 103. a. Yes, at the end of the year, the account balance
long it takes. Begin by dividing both sides by P (it 12⋅1
⎛ 0.055 ⎞
will cancel from both sides), and then take the will be A = $50, 000 ⎜1 + ⎟ = $52,820.39,
⎝ 12 ⎠
logarithm of both sides: log 3 = log(1.08)t . A
and the interest of $2820.39 is sufficient for the
property of logarithms says the exponent t can be scholarship.
moved in front of the logarithm, as such:

Copyright © 2015 Pearson Education, Inc.

81 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 81

103. (continued) 109. a. FV(0.10,5,0,100) = $161.05

b. No, at the end of the year, the account balance b. FV(0.02,535,0,224) = $8,940,049.24
⎞
12⋅1
⎛ 0.048 110. a. FV(0.03,20,0,500) = $903.06
will be A = $50, 000 + = $52, 453.51,
⎜⎝1 b. FV(0.06,20,0,500) = $1603.57: The amount is
12
and the interest of $2453.51 is not sufficient for less than double.
the scholarship. c. FV(0.03,40,0,500) = $1631.02: The amount is
c. About 4.9%. less than double.
0.06 d. FV(0.03,20,0,1000) = $1806.11: The amount is
104. a. The fund will generate $120, 000 × = $600 double the amount in part a.
12
each month. 111. a. FV(0.03/12,60,0,5000) = $5808.08
0.03 b. FV(0.045/12,30*12,0,800) = $3078.16
b. The fund will generate $120, 000 × = $300
12 c. FV(0.0375/365,365*50,0,1000) = $6520.19
each month. 112. a. EFFECT(0.04,4) = 0.04060401 = 4.0604%
r b. EFFECT(0.04,12) = 0.040741543 = 4.0742%
c. Solving $120, 000 × = $900 yields 9%.
12 c. EFFECT(0.04,365) = 0.040808493 = 4.0808%
d. EFFECT(0.04,100000) = 0.0408106 =
TECHNOLOGY EXERCISES 4.0811%: Using a very large value for the number
of compoundings is one way to estimate the
108. a. 612 = 2,176, 782,336 continuous compounding rate.
b. 1.0140 = 1.488864 113. a. e3.2 = 24.532 5
c. 20 ×1.0516 = 43.657492 . b. e0.065 = 1.0672

d. 4 −5 = 0.00097656 c. 100 × e0.04 = 104.0811. So the APY is

income. Opinions will vary on the veracity of the

e. 1.08−20 = 0.214548 advice.

UNIT 4C
TIME OUT TO THINK
Pg. 221. Your best choice in any particular situation
will depend on your financial circumstances. Most
people don’t have nearly $60,000 to put into a
savings account, and therefore would opt for the
regular payments of a savings plan. However, if you
are lucky enough to get a sudden windfall of at
least $60,000, such as an inheritance, you might
decide to use it as a lump sum for the college fund.
Pg. 226. Answers will vary. Whether money invested
on March 6, 2013 would be worth more or less
depends on the current value of the DJIA.
Pg. 227. Younger people have more time to recover if
investments fall due to volatile investments, such
as stocks and are likely less dependent on their
savings since they are still working while people
who are retired or nearing retirement would have
less time to recover their investments and are more
likely to be using their investments as a source of

Copyright © 2015 Pearson Education, Inc.

82 CHAPTER 4: MANAGING MONEY UNIT 4B: THE POWER OF COMPOUNDING 82

$4.081/$100 = 4.0811%.

Pg. 229. Answers will vary. As of this writing,

Microsoft is selling at approximately $31, which is
higher than the quote in Figure 4.6. Since the stock
is higher, it appears the company is doing well.
Pg. 232. Answers will vary. As of this writing, the
fund has an NAV of $170, which is higher than
that in Figure 4.7.

QUICK QUIZ
1. a. As the number of compounding periods n
increases, so does the APY, and a higher APY
means a higher accumulated balance.
2. c. As long as the savings plan in which you are
investing money has a positive rate of return, the
balance will increase as time increases.
3. c. The total return on a five-year investment is
simply the percent change of the balance over five
years.

Copyright © 2015 Pearson Education, Inc.

77 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 77

4. b. The annual return is the APY that gives the 12. Makes sense. A liquid investment is one where it
same overall growth in five years as the total is easy to access your money.
return. 13. Does not make sense. Stocks are considered a
5. a. If you deposit $100 per month for ten years risky investment (especially in the short term). In
(120 months), you have deposited a total of general, an investment with a greater return is
$12,000 into the savings plan. Since the balance even more risky, and thus the claim that there is no
was $22,200, you earned $22,200 – $12,000 = risk at all is dubious, at best.
$10,200 in interest. 14. Makes sense. Financial advisors generally tell
6. a. If you can find a low risk, high return retired people (who depend on their life savings
investment, that’s the best of both worlds, and for income) to invest in low-risk funds, lest they lose
adding high liquidity (where it’s easy to access your a big portion of their nest egg. U.S. Treasury bills,
money) is like icing on the cake. Good luck. notes and bonds are considered low-risk
7. b. Market capitalization is the share price of a investments.
company times the number of outstanding shares.
Company B has the greatest market capitalization BASIC SKILLS AND CONCEPTS
of $9 per share × 10,000,000 shares =
$90,000,000, which is greater than the market ⎡ ⎛ 0.03 ⎞12 ⎤
⎢ + − ⎥
capitalization of $10,000,000 for companies A and $150 ⎜1 ⎟ 1
⎝⎢ 12 ⎠
C. ⎣ ⎥⎦
15. A = = $1824.96
8. a. The P/E ratio is the share price divided by ⎛ 0.03⎞

earnings per share over the past year. 12

9. b. If the bond is selling at 103 points, it is selling ⎡ ⎛ 0.025 ⎞12×5 ⎤
at 103% of its face value, which is 1.03 × $5000 = $100 ⎢ ⎜1 + −1⎥
⎝= ⎟⎠
$5150. ⎢⎣ 12
16. ⎥⎦
10. c. The one-year return is simply a measure of how A= = $6384.05
⎛ 0.025⎞
well the mutual fund has done over the last year, 12
and it could be higher or lower than the three-year
return (which measures how well the fund has ⎡ ⎛ 0.04 ⎞12×3 ⎤
done over the last three years). $400 ⎢ ⎜1+ ⎟ −1⎥
⎝⎢ 12 ⎠
⎥⎦
⎣
17. A = = $15, 272.62
⎛ 0.04⎞
DOES IT MAKE SENSE? 12
9. Does not make sense. With an APR of 4%, the
savings plan formula gives a balance of ⎡⎛ = 0.05 ⎤
12×2 −1⎥
⎞
$250 ⎢ ⎜1 + ⎟
⎡ ⎛ 0.04 ⎞12⋅30 ⎤ ⎝⎢ 12 ⎠
⎣ ⎦⎥
$25 ⎢ ⎜1 + −1⎥ 18. A = = $6296.48
⎟
⎢⎣⎝ 12 ⎠ ⎛ 0.05⎞

A= = $17,351 after 30 12
⎛ 0.04⎞
⎞
12 Note that 24 months is 2 years.
years, which probably wouldn’t cover expenses 19. You save for 40 years, so the value of the IRA is

for even one year of retirement (and certainly ⎡⎛ 0.05

12×40 ⎤
interest earned on that balance would not be $75 + −1⎥

Copyright © 2015 Pearson Education, Inc.

78 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 78
⎢ ⎜1 ⎟
enough for retirement). You should plan to save ⎢⎣⎝ 12 ⎠
A= = $114, 451.51
considerably more than $25 per month for a ⎛ 0.05⎞
retirement plan. 12
10. Does not make sense. When you find an Since you deposit $75 each month for 40 years,
investment that guarantees an APR of 15% for the your total deposits are
next 30 years, please tell me about it. $75 12 mo

11. Does not make sense. Stocks can be a risky × × 40 yr = $36,000 . The value of the
mo yr
investment (you might lose all of your money),
account is just over three times the amount you
and most financial advisors will tell you to
deposited.
diversify your investments.

Copyright © 2015 Pearson Education, Inc.

79 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 79

20. She saves for 40 years, so the value of the IRA is ⎛ 0.06 ⎞
$2, 000, 000 ⎜
⎡ ⎛ 0.0625 ⎞12×40 ⎤ ⎝ 12 ⎟⎠
$50 ⎢ ⎜1 + −1⎥ PMT = = $1991.01 .
⎟⎠ ⎡ ⎛ 0.06 ⎞12×30 ⎤
⎢⎣⎝ 12 ⎥⎦ ⎢ ⎜1 +
A= = $106,595.63 ⎟ −1⎥
12
⎛ 0.0625⎞ ⎢⎣ ⎝ ⎠

12 You should deposit $1991.01 each month.

Since she deposits $50 each month for 40 years,
⎡⎛ = ⎞
0.055 ⎤
her total deposits are 12×3 −1⎥
PMT ⎢ ⎜1 +
$50 12 mo ⎢⎣⎝= 12 ⎟⎠
× × 40 yr = $24,000 . The value of her 25. Solve $15, 000 = for
mo yr ⎛ 0.055⎞

account is more than four times the value of the 12

amount invested.
⎛ 0.055⎞
$15, 000 ⎜
⎡ ⎛ 0.035 ⎞ 12×18 ⎤ ⎝ 12 ⎟⎠
$300 ⎢ ⎜1 + −1⎥ PMT. PMT = = $384.19 .

⎝ ⎟ ⎡ ⎛ 0.055 ⎞12×3 ⎤
⎣⎢ 12 ⎠ ⎥⎦
21. A = = $90, 091.51 ⎢ ⎜1 + −1⎥

⎛ 0.035⎞ ⎢⎣ ⎝ 12

12 You should deposit $384.19 each month.

You have deposited
⎡ 12×45 ⎤
⎛ 0.045⎞
PMT ⎢ ⎜1 + −1⎥

$300 12 mo ⎝ 12
× ×18 yr = $64,800 , which is a little
mo yr ⎢⎣
26. Solve $5, 000, 000 =
less than three-fourths of the value of the account. ⎛ 0.045⎞

⎡ ⎛ 0.045 ⎞12×18 ⎤ 12
$200 ⎢ ⎜1 + −1⎥ for PMT.
⎟
⎢⎣⎝ 12 ⎠ ⎥⎦ ⎛ 0.045⎞
22. A = = $66,373.60 . $5, 000, 000

⎛ 0.045⎞ 12
PMT = = $2863.70 .
12 ⎡⎛ 0.045 ⎞
12×45 ⎤
You have deposited ⎢ ⎜1 + ⎟ −1⎥
$200 12 mo ⎢⎣ ⎝ 12 ⎠ ⎥⎦
× ×18 yr = $43,200 , which is about
mo yr You should deposit $2863.70 each month.
two-thirds of the value of the account. 27. First, find out how large your retirement account
needs to be in order to produce $100,000 in
⎡ ⎛ 0.05 ⎞12×15 ⎤ interest (at 6% APR) each year. You want 6% of
PMT ⎢ ⎜1 + −1⎥
23. Solve $85, 000 =

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80 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 80

⎟
⎢⎣⎝ 12 ⎠ the total balance to be
for $100,000, which
means the total
⎛ balance should be
0 $100,000/0.06 =
. $1,666,667. Now solve
0
5
⎞

12
⎡⎛ 0.06 ⎞12×30 ⎤
⎛ 0.05⎞ PMT ⎢ ⎜1+ ⎟ −1⎥
$85, 000
12 ⎢⎣⎝ 12 ⎠
PMT. PMT = = $318.01 . $1, 666, 667 = for

⎡ ⎛ 0.05 12×15 ⎤ ⎛ 0.06⎞

⎞
⎢ ⎜1 + ⎟ −1⎥
⎢⎣ ⎝ 12 ⎠ ⎥⎦
12
PMT.
You should deposit $318.01 each month.
⎛ 0.06⎞
$1, 666, 667 ⎜
⎡ ⎛ 0.06 ⎞12×30 ⎤ ⎝ 12 ⎟⎠
PMT ⎢ ⎜1 + −1⎥
⎟⎠ PMT = = $1659.18 . You
⎝⎢ 12 ⎡ ⎛ 0.06 ⎞12×30 ⎤
⎣
24. Solve $2, 000, 000 = ⎢ ⎜1 + ⎟ −1⎥
⎛ 0.06 ⎞ ⎢⎣ ⎝ 12 ⎠ ⎥⎦

12
should deposit $1659.18 each month.
for PMT.

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81 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 81

28. First, find out how large your retirement account 32. You invested $5000 (200 shares at $25 per share),
needs to be in order to produce $200,000 in $8500 − $5000

interest (at 6% APR) each year. You want 6% of so the total return is = 70.0% . The
$5000
the total balance to be $200,000, which means the (1/ 3)
total balance should be $200,000/0.06 = ⎛ $8500 ⎞
annual return is −1 = 19.3% .
⎟
$3,333,333. Now solve $5000 ⎠
⎡⎛ 0.06
12×40 ⎤ $2000 −$3500
⎞ = −42.9% . The
PMT ⎢ ⎜1 + −1⎥ 33. The total return is
⎟
⎢⎣⎝ 12 ⎠ $3500

$3, 333, 333 = (1/ 3)

⎛ 0.06⎞ ⎛=
$2000 ⎞
annual return is −1 = −17.0% .
12 $3500

for PMT. $3000 −$5000

34. The total return is = −40.0% . The
⎛ 0.06 ⎞ $5000
$3,333,333
⎜⎝ ⎟⎠ (1/ 5)
$3000
12
= $1673.79 . ⎛ ⎞
PMT = annual return is −1 = −9.7% .
⎡ ⎛ 0.06 ⎞12×40 ⎤ ⎜⎝ ⎟
$5000 ⎠
⎢ ⎜1 + ⎟ −1⎥
⎢⎣ ⎝ 12 ⎠ ⎥⎦ $12, 600 −$7500
35. The total return is = 68.0% . The

You should deposit $1673.79 each month. $7500

(1/10)
29. The total return is the relative change in the ⎛ $12,600 ⎞
annual return is ⎜ ⎟ −1 = 5.3% .
investment, and since you invested $6000 (100 ⎝ $7500 ⎠
shares at $60 per share), the total return is
$2200 − $10, 000
$9400 −$6000 36. The total return is = −78.0% .
= 0.567 = 56.7% . The annual $10, 000
$6000
The annual return is
return is the APY that would give the same overall
(1/10)
growth in five years, and the formula for ⎛ $2200 ⎞
(1/ Y ) ⎜⎝ $10, 000 ⎟⎠ −1 = −14.1% .
⎛ A⎞
computing it is ⎜ ⎟ −1 . Thus the annual

⎝P⎠ 37. $300 invested in stocks would be worth

(1/ 5)
⎛ $9400 ⎞ 112
$300(1 + 0.063) = $281, 091 . For bonds and
return is ⎜
⎝ $6000 ⎟⎠ −1 = 0.094 = 9.4% .
cash, the investments would be worth

30. The total return is the relative change in the $300(1 + 0.02)112 = $2756 , and
$12, 500 −$8000 $300(1 + 0.009)112 = $818 , respectively.
investment, or = 0.563 = 56.3% .
$8000
38. The $10 investment in stocks would be worth
The annual return is the APY that would give the
same overall growth in 20 years, and the formula
(1/ Y )
⎛ A⎞

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82 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 82

$10(1+ 0.063)112 = $9370 , which is more than the

investments in bonds and cash, which would be
for computing it is ⎜ ⎟ −1 . Thus the annual $75(1 + 0.02)112 = $689 ,
⎝P⎠ worth and

⎛ $12,500⎞
(1/ 20) $500(1 + 0.009)112 = $1364 , respectively.
return is ⎜ ⎟ −1 = 0.023 = 2.3% .
⎝ $8000 ⎠ 39. a. The symbol for Intel stock is INTC.
$11, 300 −$6500 b. Intel stock closed at $15.48 per share yesterday.
31. The total return is = 73.8% . The
$6500 c. The total value of shares traded today is
(1/ 20) $15.48/share × 64 million shares = $990 million.
⎛ $11,300 ⎞
annual return is ⎜ ⎟ −1 = 2.8% . d. 64 million/5580 million = 1.1% of all Intel
⎝ $6500 ⎠
shares have been traded so far today.
e. You should expect a dividend of 100 × $15.48
× 0.0362 = $56.04.
f. The earnings per share is $15.48/19.77 = $0.783
= $0.78/share.

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83 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 83

39. (continued) 51. The price of this bond is 105% × $1000 = $1050,
g. Intel earned a total profit of $0.783/share × and it has a current yield of 3.9%, so the annual
5580 million shares = $4369 million, so Intel interest earned is $1050 × 0.039 = $40.95.
earned a total profit of about $4.37 billion. 52. The price of this bond is 98% × $1000 = $980,
40. a. The symbol for Wal-Mart stock is WMT. and its current yield is 1.5%, which means the
annual interest will be $980 × 0.015 = $14.70.
b. Wal-Mart stock closed at $50.00 per share
53. The price of this bond is 114.3% × $1000 =
yesterday.
$1143, and its current yield is 6.2%, which means
c. The total value of shares traded today is the annual interest will be $1143 × 0.062 =
$50.00/share × 17.28 million shares = $864 $70.87.
million.
54. The price of this bond is 102.5% × $10,000 =
d. 17.28 million/3910 million = 0.44% of all Wal- $10,250, and it has a current yield of 3.6%, so the
Mart shares have been traded so far today. annual interest earned is $10,250 × 0.036 = $369.
e. You should expect a dividend of 100 × $50.00 55. a. You would buy $5000/$10.93 = 457.46 shares.
× 0.0218 = $109.00.
b. Your investment would be worth
f. The earnings per share is $50.00/14.88 = $3.36
$5000 × (1 + 0.0320 ) = $5852.86.
5
= $3.36/share.
g. Wal-Mart earned a total profit of $3.36/share × c. Your investment would be worth
3910 million shares = $13,137 million, so Wal- 10

$5000 × (1 + 0.0369 ) = $7183.54.

Mart earned a total profit of about $13.1 billion.

41. a. The earnings per share for COSTCO is 56. a. You would buy $2500/$10.82 = 231.05 shares.
$48.30/17.25 = $2.80/share. b. Your investment would be worth
b. The stock is slightly overpriced. $2500 × (1 + 0.0482 ) = $3163.45.
5

42. a. The earnings per share for General Mills is

$52.65/16.14 = $3.26/share. c. Your investment would be worth
$2500 × (1 + 0.0619 )
10
b. The stock is slightly overpriced. = $4558.02.
43. a. The earnings per share for IBM is
$101.89/11.30 = $9.02/share. FURTHER APPLICATIONS
b. The stock is priced just about right. 57. After 10 years, the balance in Yolanda’s account is
44. a. The earnings per share for Google is ⎡ ⎛ 0.05 ⎞12×10 ⎤
$393.50/28.78 = $13.67/share. $200 ⎢ 1 + ⎟⎠ −1⎥
⎜
⎢⎝ ⎥
b. The stock overpriced. $31, 056.46 . She
⎣ 12 ⎦ =
45. – 46. Answers will vary. A=
⎛ 0.05 ⎞

47. The current yield on a bond is its annual interest 12

payment divided by its current price. A $1000 deposits $200 per month, so her total deposits are
bond with a coupon rate of 2% pays $1000 × 0.02 $200 12 mo
= $20 per year in interest, so this bond has a × ×10 yr = $24,000 . Zach’s account
mo yr
current yield of $20/$950 = 2.11%. is worth
48. The current yield on a bond is its annual interest ⎡ ⎛ 0.05 ⎞1×10 ⎤
payment divided by its current price. A $1000 $2400 ⎢ ⎜1 + −1⎥
⎝ ⎟
bond with a coupon rate of 2.5% pays $1000 × ⎣⎢ 1 ⎠
0.025 = $25 per year in interest, so this bond has a A= = $30,186.94 . He
⎛ 0.05 ⎞

current yield of $25/$1050 = 2.38%.

1

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84 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 84

49. The annual interest payment on this bond is $1000 deposits $2400 per year, so his total deposits are
× 0.055 = $55, so its current yield is $55/$1100 = $2400
5%. ×10 yr = $24,000 . Yolanda comes out
yr
50. The annual interest payment on this bond is ahead even though both deposited the same
$10,000 × 0.03 = $300, so its current yield is amount of money because the interest in her
$300/$9500 = 3.16%. account is compounded monthly, while Zach’s is
compounded yearly, which means Yolanda enjoys
a higher APY.

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85 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 85

58. After 10 years, the balance in Polly’s account is ⎡⎛ 0.075 ⎞

4×10 ⎤

⎡ ⎛ 0.06 12×10 ⎤ $150 ⎢ ⎜1+ ⎟ −1⎥

⎞ 4⎠
$50 ⎢ ⎜1 + −1⎥ ⎢⎣⎝
⎝ ⎟
⎠ A= = $8818.79 . His
⎢⎣ 12 ⎥⎦ ⎛ 0.075⎞
A= = $8193.97 . She
⎛ 0.06 ⎞ 4
12 $150 4 qtr
deposits $50 per month, so her total deposits are total deposits are × ×10 yr = $6000 .
qtr yr
$50 12 mo
× ×10 yr = $6000 . Quint’s account is Harvey comes out ahead because he deposited
mo yr more money, and had a higher APR (and APY).

⎡ ⎛ 0.065 12×10 ⎤ ⎡ 12⋅15 ⎤

⎞ ⎛
0.07
⎞
$40 ⎢ ⎜1 + −1⎥
⎝⎢ 12 ⎟⎠ $50 ⎢ ⎜1 + ⎟ −1⎥
⎣ 12
worth A = = $6736.13 . ⎢⎣⎝ ⎠
⎛ 0.065 ⎞ 61. Your balance will be A =
⎛ 0.07 ⎞
12 12
He deposits $40 per month, so his total deposits = $15,848.11, so you won’t reach your goal.
$40 12 mo
are × ×10 yr = $4800 . Polly comes out ⎡ 12⋅15 ⎤
$75 ⎢ ⎛⎜1+
0.07 ⎞
mo yr ⎟ −1⎥
⎝ ⎠
ahead despite the fact that she has the lower APR, ⎢⎣ 12
62. Your balance will be A =
because she deposited more each month. ⎛ 0.07 ⎞
59. After 10 years, the balance in Juan’s account is 12
⎡ ⎛ 0.06 ⎞12×10 ⎤ = $23,772.17, so you won’t reach your goal.
$400 ⎢ ⎜1 + −1⎥
⎟
⎢⎣⎝ 12 ⎠ 63. Your balance will be

A= = $65,551.74 . His ⎡⎛ 12⋅15 ⎤

⎛ 0.06 ⎞ 0.06 ⎞
$100 ⎢ ⎜1+ ⎟ −1⎥
12 12

⎝ ⎠ = $29,081.87, so
total deposits are ⎣⎢
A=
⎛ 0.06 ⎞
$400 12 mo 12
× ×10 yr = $48,000 . The balance in
mo yr you won’t reach your goal.
Maria’s account is 64. Your balance will be
⎞
$5000 ⎡(1+ 0.065 ) −1⎤
10
⎡ ⎛ 0.05 12⋅15 ⎤
A= ⎣ ⎦ = $67, 472.11. $200 ⎢ ⎜1+ −1⎥
Her ⎟
(0.065) ⎝⎢ 12 ⎠
⎣
A= = $53,457.79 so
$5000 ⎛ 0.05⎞
total deposits are ×10 yr = $50,000 . Maria
yr 12

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86 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 86

comes out ahead because she has a higher APR (and you will reach your goal.
APY, it turns out), and she deposits more money $8.25 − $6.05
over the course of the 10 years. 65. The total return is = 36.4% per
$6.05
60. After 10 years, the balance in George’s account is
share. Incidentally, this is also the annual return
⎡ ⎛ 0.07 ⎞12×10 ⎤ (because you bought the stock a year ago), and it
$40 ⎢ ⎜1 + −1⎥
⎝ 12 ⎠ ⎟ doesn’t matter how many shares you bought.
⎣⎢ ⎥⎦
A= = $6923.39 . His $8.25 −$46.25
⎛ 0.07 ⎞ 66. The total return is = −82.2% per

12 $46.25
share.
$40 12 mo
total deposits are × ×10 yr = $4800 .
mo yr
Harvey’s balance is

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87 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 87

$22, 000, 000 −$5000 70. A = P × (1+ APY )

Y
67. The total return was =
$5000
A
= (1 + APY )
Y
439,900%. The annual return was
(1/ 50)
P
⎛ $22,000,000 ⎞ 1/ Y 1/ Y
⎜ ⎟ −1 = 18.3% , which is much ⎛ A⎞ ⎛ A⎞
⎝ $5000 ⎠ = 1 + APY ⇒ APY = −1
P P
higher than the average annual return for large-
company stocks.
68. The monthly deposit would be $5.50 × 16 = $88. TECHNOLOGY EXERCISES
The final value of the savings plan for the ex-
77. a. FV(0.04/12,12*25,100,0) = $51,412.95
⎡ ⎛ 0.04 ⎞ 12⋅45 ⎤
$88 ⎢ ⎜1 + −1⎥ b. FV(0.08/12,12*25,100,0) = $95,102.64.
⎟
⎢⎣⎝ 12 ⎠ The amount is less than double
smoker will be A = =
⎛ 0.04⎞ c. FV(0.04/12,12*50,100,0) = $190,935.64.
12 The amount is more than double.
$132,833. 78. a. Abe deposits $50 ×12 × 40 = $24, 000 and
69. a. At age 35, the balance in Mitch’s account is
Beatrice deposits $100 ×12 × 20 = $24, 000.
$1000 ⎡(1+ 0.05) −1⎤
10
⎣ ⎦ b. Abe will have a total of FV(0.055/12,12*40,50,0)
A= = $12,577.89 . At this
0.05 = $87,051.98 while Beatrice will have a total of
point, it is no longer appropriate to use the savings FV(0.055/12,12*20,100,0) = $43,562.74. Abe has
plan formula as Mitch is not making further deposits more money since he started investing earlier,
into the account. Instead, use this balance as the which took more advantage of compound interest.
principal in the compound interest formula, and
compute the balance 40 years later. 79. a. 2.81/ 4 = 1.293569
A = $12,578(1+ 0.05) 40 = $88, 548.20 . b. 1201/ 3 = 4.932424
b. At age 75, the balance in Bill’s account is c. We need to solve the equation
15
$1000 ⎡(1+ 0.05) −1⎤
30

⎣ ⎦ 1850 = 250 × (1+ r) . Using algebra, rewrite the

A= = $66, 438.85 .
0.05 1850 15

c. Mitch deposited $1000 per year for ten years, equation as = (1+ r) .
250
which is $10,000. Bill deposited $1000 per year
Now raise both sides to the reciprocal power of
for 30 years, which is $30,000, or three times as
large as Mitch’s total deposits. 15, i.e. to the 1/15 power, and then subtract 1 to

1850 1/15

⎛ ⎞
d. Answer will vary. find r = −1 = 0.1427 = 14.27% .

Pg. 241. This question should help students realize

how installment loans work. More than half the
UNIT 4D payment goes to interest because it is early in the
loan term when the balance is high, and the 9%
TIME OUT TO THINK interest rate is calculated on this entire balance.
Late in the term, when the balance is low, interest
will make only a small portion of the payments.

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88 CHAPTER 4: MANAGING MONEYUNIT 4C: SAVINGS PLANS AND INVESTMENTS 88

For example, when the balance is down to $500, 250

the monthly interest is only 0.0075 × $500 =
$3.75, so almost all of the $95.01 monthly
payment will be going to principal at that point.
Pg. 242. Answers will vary, but in general: the shorter
term loan is better if you can afford the higher
monthly payments; the longer term loan is better if
you need to minimize your monthly payments.
Pg. 244. As long as there are no hidden fees, yes! The
lower interest rate will save in total interest during
the year. And the bank will require monthly
payments, which should help enforce your
discipline in paying off the loan. (Since the credit
card requires only relatively small minimum
payments, you must be self-disciplined to pay it
off in a year.) Of course, all this assumes that you
don’t simply go deeper into debt as a result of
having lower payments.

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83 CHAPTER 4: MANAGING
UNIT 4D: LOAN
MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 83

Pg. 246. Interest rates will vary, but the payments will 8. Makes sense. This plan is the essence of
be higher with higher interest rates and lower with refinancing a loan.
lower interest rates 9. Does not make sense. Making only the minimum
Pg. 248. Answers will vary. It would make sense to required payment on a credit card is asking for
invest the extra money when the earnings on those financial trouble as the interest rates on credit
investments would be worth more than the interest cards are typically exorbitant. You’ll end up
saved by making extra payments. spending a lot of your money on interest.
Counterarguments might be the comfort and lower 10. Does not make sense. Credit card companies often
stress of knowing you can pay of your debts offer teaser rates to get new customers – after
sooner. three months, the interest rate will balloon to who
Pg. 249. Answers will vary, but one circumstance knows what level, and that’s what matters in the
might be someone who only plans to live in a long run.
house for a short time and expects the value of the 11. Makes sense. In the worst-case scenario, the ARM
house to increase. (Given the recent housing crisis, loan will be at 6% in the last year you expect to
this may no longer be a good idea.) live in the home, so it’s certain you’ll save money
on the first two years, and you may even save
during the last year.
QUICK QUIZ
12. Does not make sense. While it’s true that you’ll save
1. a. Monthly payments go up when the loan money on interest if you take a 15-year loan, there
principal is larger because you are borrowing more are many scenarios where it’s better to take a
money. 30-year loan (for example: you may not be able to
2. a. The payment will be higher for a 15-year loan afford the higher payments that go with a 15-year
because there is less time to pay off the principal. loan; if interest rates are low, there are tax benefits
3. b. A higher APR means more money goes to and investment strategies that make a 30-year loan
paying off interest, and this corresponds with a a wiser choice).
higher payment.
4. b. Most of an early payment goes to interest, because BASIC SKILLS AND CONCEPTS
the principal is large at the beginning stages of a
13. a. The starting principal is $80,000 with an annual
loan, and thus the interest is also large.
interest rate of 7%. You’ll make 12 payments each
5. c. Every year you’ll pay $12,000, and thus after year (one per month) for 20 years, and each payment
ten years, you’ll pay $120,000. will be $620.
6. c. Most credit card loans only require that you b. Since you make 12 payments per year for 20
make a minimum payment each month; there is no years, you’ll make 12 × 20 = 240 payments in
specified time in which you must pay off a loan. total, which amounts to 240 × $620 = $148,800
7. c. A two-point origination fee just means that you over the term of the loan.
must pay 2% of the loan principal in advance, and c. The loan principal is $80,000/$148,800 = 53.8%
2% of $200,000 is $4000. of the total payment. $148,800 – $80,000 =
8. b. Add $500 to 1% (one point) of the loan $68,800, so $68,800/$148,800 = 46.2% of the total
principle of $120,000 to find the advanced payment is interest.
payment required. 14. a. The starting principal is $15,000 with an annual
9. c. Refinancing a loan is not a good idea if you’ve interest rate of 9%. You’ll make 12 payments each
nearly paid the loan off. year (one per month) for 10 years, and each payment
10. a. A shorter loan always has higher monthly will be $190.
payments (all other things being equal) because b. Because you make 12 payments per year for 10
there is less time to pay off the principal, and years, you’ll make 12 × 10 = 120 payments in
you’ll spend less on interest because the principal total, which amounts to 120 × $190 = $22,800
decreases more quickly. over the term of the loan.
c. The loan principal is $15,000/$22,800 = 65.8%
DOES IT MAKE SENSE? of the total payment. $22,800 – $15,000 = $7800,
so $7800/$22,800 = 34.2% of the total payment is
7. Makes sense. For a typical long-term loan, most of
interest.
the payments go toward interest for much of the
loan term. See Figure 4.8 in the text.

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84 CHAPTER 4: MANAGING
UNIT 4D: LOAN
MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 84

15. a. The monthly payment is b. The total payment is $1109.53 × 12 × 15 =

$199,716.
⎛ 0.06⎞
$50,000
12 c. The percent spent on interest is
PMT = = $358.22 . $199,716 −$150, 000
−12×20
⎛ 0.06 ⎞ = 0.249 = 24.9% , while
1 − ⎜1 + ⎟ $199,716
⎝ 12 ⎠
$150, 000
= 0.751 = 75.1% goes toward the
b. The total payment is $358.22 × 12 × 20 =
$85,973. $199,716
principal.
c. The percent spent on interest is
19. a. The monthly payment is
$85, 973 −$50, 000
= 0.418 = 41.8% , while
$85, 973 ⎛ 0.03 ⎞
$200, 000
12
$50, 000
= 0.582 = 58.2% goes toward the PMT = −12×15
= $1381.16 .
$85,973 ⎛ 0.03⎞
1 − ⎜1+ ⎟
principal. ⎝ 12 ⎠
16. a. The monthly payment is b. The total payment is $1381.16 × 12 × 15 =
$248,609.
⎛ 0.07 ⎞
$12, 000
12 c. The percent spent on interest is
PMT = = $139.33 . $248,609 −$200, 000
−12×10
⎛ 0.07 ⎞ = 0.196 = 19.6% , while
1 − ⎜1 + ⎟ $248,609
⎝ 12 ⎠
$200, 000
= 0.804 = 80.4% goes toward the

b. The total payment is $139.33 × 12 × 10 =

$248,609
$16,720.
principal.
c. The percent spent on interest is
20. a. The monthly payment is
$16,720 −$12, 000
= 0.282 = 28.2% , while
$16,720 ⎛ 0.04⎞
$100, 000
12
$12, 000
= 0.718 = 71.8% goes toward the PMT = −12×30
= $477.42 .
$16,720 ⎛ 0.04⎞
1 − ⎜1+ ⎟
principal. ⎝ 12 ⎠
17. a. The monthly payment is b. The total payment is $477.42 × 12 × 30 =
$171,871.
⎛ 0.035⎞
$200, 000
12 c. The percent spent on interest is
PMT = = $898.09 . $171,871 −$100, 000
−12×30
⎛ 0.035⎞ = 0.418 = 41.8% , while
1 − ⎜1 + ⎟ $171,871
⎝ 12 ⎠
$100, 000
= 0.582 = 58.2% goes toward the

b. The total payment is $898.09 × 12 × 30 = $323,312.

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85 CHAPTER 4: MANAGING
UNIT 4D: LOAN
MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 85

c. The percent spent on interest is $171,871

principal.
$323, 312 −$200, 000 21. a. The monthly payment is
= 0.381 = 38.1% , while ⎛ 0.08⎞
$323,312 $10, 000
12
$200, 000
= 0.619 = 61.9% PMT = −12×3
= $313.36 .
goes toward the
$323,312 ⎛ 0.08⎞
1 − ⎜1+ ⎟
principal. ⎝ 12 ⎠

18. a. The monthly payment is b. The total payment is $313.36 × 12 × 3 =

$11,2801.
⎛ 0.04⎞
$150, 000
12
PMT = −12×15
= $1109.53 .
⎛ 0.04 ⎞
1 − ⎜1 + ⎟
⎝ 12 ⎠

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86 CHAPTER 4: MANAGING
UNIT 4D: LOAN
MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 86

21. (continued) $100, 000

= 0.489 = 48.9% goes toward the
c. The percent spent on interest is $204,404

$11,281 −$10, 000 principal.

= 0.114 = 11.4% , while
$11,281 25. The monthly payment is
$10, 000 ⎛ 0.04⎞
= 0.886 = 88.6% goes toward the
$11,281 =$150, 000 ⎝
12 ⎠
principal. PMT = ⎜ ⎟
−12×30
= $716.12 .
⎛ 0.04 ⎞
1 − ⎜1+
22. a. The monthly payment is
⎝ 12 ⎟⎠
⎛ 0.065⎞ To compute the interest owed at the end of one
$10, 000
12 month, multiply the beginning principal of
PMT = = $195.66 .
−12×5
⎛ 0.065 ⎞ $150,000 by the monthly interest rate of 4%/12.
1 − ⎜1 + ⎟ This gives $150,000(0.04/12) = $500.00. Because
⎝ 12 ⎠
the monthly payment is $716.12, the amount that
b. The total payment is $195.66 × 12 × 5 = goes toward principal is $716.12 – $500.00 =
$11,740. $216.12. Subtract this from $150,000 to get a new
c. The percent spent on interest is principal of $150,000 – $216.12 = $149,783.88.

$11,740 −$10, 000 For the second month, repeat this process, but
= 0.148 = 14.8% , while
$11,740 begin with a principal of $149,783.88. The results
are shown in the following table through the third
$10, 000
= 0.852 = 85.2% goes toward the month – note that rounding errors at each step
$11,740
propagate through the table, which means that our
principal. answers may differ slightly from those that a bank
23. a. The monthly payment is would compute.
⎛ 0.05⎞ Payment
$150, 000 End of toward New
month Interest principal Principal
12
PMT = −12×15
= $1186.19 .
⎛ 0.05 ⎞ 1 $500.00 $216.12 $149,783.88
1 − ⎜1 + ⎟ 2 $499.28 $216.84 $149,567.04
⎝ 12 ⎠ 3 $498.56 $217.56 $149,349.48
b. The total payment is $1186.19 × 12 × 15 =
$213,514.
c. The percent spent on interest is 26. The monthly payment is

$213,514 −$150, 000 ⎛ 0.08 ⎞

= 0.297 = 29.7% , while = $24, 000 ⎜ ⎟
$213,514 ⎝ 12 ⎠
PMT = = $229.36 .
$150, 000 −12×15
= 0.703 = 70.3% goes toward the ⎛ 0.08⎞
1 − ⎜1+
$213,514
⎝ 12 ⎠⎟
principal. To compute the interest owed at the end of one
24. a. The monthly payment is month, multiply the beginning principal of
⎛ 0.055⎞ $24,000 by the monthly interest rate of 8%/12.
$100, 000
12 This gives $24,000(0.08/12) = $160. Because the
PMT = = $567.79 . monthly payment is $229.36, the amount that goes

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87 CHAPTER 4: MANAGING
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MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 87

−12×30 toward principal is $229.36 – $160 = $69.36.

⎛ 0.055⎞
1 − ⎜1 + ⎟
⎝ 12 ⎠ Subtract this from $24,000 to get a new principal
b. The total payment is $567.79 × 12 × 30 = of $24,000 – $69.36 = $23,930.64.
$204,404. For the second month, repeat this process, but
c. The percent spent on interest is begin with a principal of $23,930.64. The results are
shown in the following table through the third
$204,404 −$100, 000
= 0.511 = 51.1% , while month – note that rounding errors at each step
$204,404 propagate through the table, which means that our
answers may differ slightly from those that a bank
would compute.

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88 CHAPTER 4: MANAGING
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MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 88

26. (continued) 31. a. The monthly payment is

⎛ 0.21 ⎞
= $5000⎝
Payment
PMT = ⎜ ⎟ 12 ⎠ = $188.38 .
End of toward New −12×3
⎛ 0.21 ⎞
month Interest principal Principal 1 − 1+
1 $160.00 $69.36 $23,930.64 ⎝⎜ 12 ⎠⎟
2 $159.54 $69.82 $23,860.82
b. Your total payments are $188.38 × 36 =
3 $159.07 $70.29 $23,790.53 $6781.68.
27. For the 3-year loan at 7% APR, the monthly c. The interest is $1781.68/$6781.68 = 26.3% of
⎛ 0.07 ⎞ the total payments.
= $12, 000 ⎝
⎟ 12 ⎠
32. a. The monthly payment is
⎜
payment is PMT = −12×3
= $370.53 .
⎛ 0.07 ⎞ ⎛ 0.22⎞
1 − ⎜1+ $5000 ⎜ ⎟

⎝ 12 ⎠⎟ ⎝ 12 ⎠
PMT = −12×1 = $467.97 .
The monthly payment for the 4-year loan is ⎛ 0.22⎞
1 − ⎜1+
$290.15, and for the 5-year loan, it is $243.32 (the
⎝ 12 ⎟⎠
computations being similar to those used for the 3-
year loan). Since you can afford only the b. Your total payments are $467.97 × 12 =
payments on the 5-year loan, that loan best meets $5615.64.
your needs. c. The interest is $615.64/$5615.64= 11.0% of the
28. For the 2-year loan at 8% APR, the monthly total payments.
⎛ 0.08⎞ 33. Complete the table as shown in the first month. To
= $4000 ⎝ find the interest for the second month, compute
⎜ ⎟ 12 ⎠
payment is PMT = −12×2
= $180.91 . $1093.00 × 0.015 = $16.40. To find the new
⎛ 0.08⎞ balance, compute $1093.00 + $75 + $16.40 – $200
1 − ⎜1+
⎝ 12 = $984.40. Continue in this fashion to fill out the
The monthly payment for the 3-year loan is rest of the table. Note that rounding errors at each
$127.20, and for the 4-year loan, it is $101.45 (the step will propagate through the table: a credit card
computations being similar to those used for the 3- company computing these balances might show
year loan). Since you can afford payments on the slightly different values.
3-year and 4-year loans, either would work for New

your budget. Month Pmt Expenses Interest balance

29. a. The monthly payment is 0 $1200.00

⎛ 0.18⎞ 1 $200 $75 $18.00 $1093.00
$5000
12 2 $200 $75 $16.40 $984.40
PMT = = $458.40 .
−12×1
⎛ 0.18 ⎞ 3 $200 $75 $14.77 $874.17
1 − ⎜1 + ⎟
⎝ 12 ⎠ c. The interest is $500.80/$5500.80 = 9.1%
b. Your total payments are $458.40 × 12 = of the total payments.
$5500.80. 30. a. The monthly payment is

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⎛ 0.20⎞ 4 $200 $75 $13.11 $762.28

$5000
5 $200 $75 $11.43 $648.71
6 $200 $75 $9.73 $533.44
7 $200 $75 $8.00 $416.44
8 $200 $75 $6.25 $297.69
9 $200 $75 $4.47 $177.16
10 $200 $75 $2.66 $54.82
12
PMT = = $254.48 . In the 11th month, a partial payment of $54.82 +
−12×2
⎛ 0.20 ⎞ $54.82 × 0.015 + $75 = $130.64 will pay off the
1 − ⎜1 + ⎟
⎝ 12 ⎠ loan.

b. Your total payments are $254.48 × 24 =

$6107.52.
c. The interest is $1107.52/$6107.52 = 18.1% of
the total payments.

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90 CHAPTER 4: MANAGING
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MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 90

34. To find the interest for the first month, compute 37. Under Option 1, the monthly payment is
$1200 × 0.015 = $18. To find the new balance, ⎛ 0.08⎞
compute $1200 + $75 + $18 – $300 = $993. $200, 000 ⎜
⎟⎝ 12 ⎠
Continue in this fashion to fill out the rest of the PMT = −12×30
= $1467.53 , and the
table. Note that rounding errors at each step will ⎛ 0.08⎞
1 − ⎜1+ ⎟
propagate through the table. ⎝ 12 ⎠

New total cost of the loan is $1467.53 × 12 × 30 =

Month Pmt Expenses Interest balance $528,310.80. Under Option 2, the monthly

payment is
0 $1200.00
⎛ 0.075⎞
1 $300 $75 $18.00 $993.00 =$200, 000 ⎝
⎜ ⎟ 12 ⎠
2 $300 $75 $14.90 $782.90 PMT = −12×15
= $1854.02 , and the
⎛ 0.075⎞
3 $300 $75 $11.74 $569.64 1 − ⎜1+ ⎟
⎝ 12 ⎠
4 $300 $75 $8.54 $353.18
total cost of the loan is $1854.02 × 12 × 15 =
5 $300 $75 $5.30 $133.48 $333,723.60. You’ll pay considerably more
In the 6th month, a partial payment of $133.48 + interest over the term of the loan in Option 1, but
$133.48 × 0.015 + $75 = $210.48 will pay off the you may be able to afford the payments under that
loan. option more easily.
35. Complete the table as shown in the first month. To 38. Under Option 1, the monthly payment is
find the interest for the second month, compute ⎛ 0.08⎞
$75, 000 ⎜
$179.50 × 0.015 = $2.69. To find next month’s ⎝ 12 ⎟⎠
balance, compute $179.50 + $150 + $2.69 – $150 PMT = −12×30
= $550.32 , and the
⎛ 0.08⎞
= $182.19. Continue in this fashion to fill out the 1 − ⎜1+ ⎟
rest of the table. Note that rounding errors at each ⎝ 12 ⎠
step will propagate through the table: a credit card total cost of the loan is $550.32 × 12 × 30 =
company computing these balances might slow $198,115.20. Under Option 2, the monthly
slightly different values. payment is
Month Pmt Expenses Interest Balance ⎛ 0.07 ⎞
$75, 000
12
PMT = −12×15
= $674.12 , and the
0 $300.00 ⎛ 0.07 ⎞
1 − ⎜1+
1 $300 $175 $4.50 $179.50 12 ⎟⎠
2 $150 $150 $2.69 $182.19 total cost of⎝ the loan is $674.12 × 12 × 15 =
3 $400 $350 $2.73 $134.92 $121,341.60. You’ll pay considerably more
4 $500 $450 $2.02 $86.94 interest over the term of the loan in Option 1, but
you may be able to afford the payments under that
5 $0 $100 $1.30 $188.24 option more easily.
6 $100 $100 $2.82 $191.06 39. Under Option 1, the monthly payment is
7 $200 $150 $2.87 $143.93 ⎛ 0.0715 ⎞
$60, 000 ⎜
8 $100 $80 $2.16 $126.09 ⎝ 12 ⎟⎠
PMT = = $405.24 , and the
−12×30
36. a. The monthly interest payment is $4000(0.06/12) ⎛ 0.0715⎞
1 − ⎜1+ ⎟
= $20. 12
⎝ ⎠
b. The monthly interest payment is $4000(0.24/12) total cost of the loan is $405.24 × 12 × 30 =
= $80, or four times as much as the teaser rate. $145,886.40. Under Option 2, the monthly
payment is

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91 CHAPTER 4: MANAGING
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MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 91

⎛ 0.0675⎞
$60, 000
12
PMT = −12×15
= $530.95 , and the
⎛ 0.0675⎞
1 − ⎜1 + ⎟
⎝ 12 ⎠
total cost of the loan is $530.95 × 12 × 15 =
$95,571.00. See Exercise 37 for pros and cons.

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92 CHAPTER 4: MANAGING
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MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 92

40. Under Option 1, the monthly payment is 43. Under Choice 1, your monthly payment is
⎛ 0.0725⎞ ⎛ 0.045⎞
$180, 000 $120, 000
12 12
PMT = = $1227.92 , and PMT = = $608.02 , and the
−12×30 −12×30
⎛ 0.0725⎞ ⎛ 0.045⎞
1 − ⎜1+ ⎟ 1 − ⎜1+
⎝ 12 ⎠ ⎝ 12 ⎟⎠
the total cost of the loan is $1227.92 × 12 × 30 = closing costs are $1200 + $120,000(0.01) = $2400.
$442,051.20. Under Option 2, the monthly For Choice 2, the payment is
payment is ⎛ 0.0425 ⎞
$120, 000
⎛ 0.068⎞ 12
$180, 000 PMT = = $590.33 , and the

12 −12×30
PMT = = $1597.83 , and the ⎛ 0.0425⎞
−12×15 1− ⎜1+
⎛ 0.068⎞
⎝ 12 ⎟⎠
1 − ⎜1+ ⎟
⎝ 12 ⎠ closing costs are $1200 + $120,000(0.03) = $4800.

total cost of the loan is $1597.83 × 12 × 15 = You’ll save $608.02 – $590.33 = $17.69 each
$287,609.40. See Exercise 37 for pros and cons. month with Choice 2, though it will take
41. Under Choice 1, your monthly payment is $2400/($17.29 per month) = 139 months (12
years) to recoup the higher closing costs, and thus
⎛ 0.04⎞ Choice 2 is the better option only if you intend to
$120, 000
12
PMT = = $572.90 , and the keep the house for at more than 11 years.
−12×30
⎛ 0.04 ⎞ 44. Under Choice 1, your monthly payment is
1 − ⎜1 + ⎟
⎝ 12 ⎠ ⎛ 0.035⎞
$120, 000 ⎜
closing costs are $1200. For Choice 2, the ⎝ 12 ⎟⎠
payment is PMT = −12×30
= $538.85 , and the

⎛ 0.035⎞
⎛ 0.035⎞ 1− + ⎟
$120, 000
⎜⎝1
12 ⎠
12
PMT = = $538.85 , and the closing costs are $1000. For Choice 2, the
−12×30
⎛ 0.035⎞ payment is
1 − ⎜1 + ⎟
⎝ 12 ⎠ ⎛ 0.03 ⎞
$120, 000 ⎜
closing costs are $1200 + $120,000(0.02) = $3600. ⎝ 12 ⎟⎠
You’ll save $572.90 – $538.85 = $34.05 each PMT = −12×30
= $505.92 , and the
1 − ⎛⎜1+ ⎞ ⎟
0.03
month with Choice 2, though it will take

$3600/($34.05 per month) = 106 months (about 9 ⎝ 12 ⎠

years) to recoup the higher closing costs, and thus closing costs are $1500 + $120,000(0.04) = $6300.
Choice 2 is the better option only if you intend to You’ll save $538.85 – $505.92 = $32.93 each
keep the house for at least 9 years. month with Choice 2, though it will take
42. Under Choice 1, your monthly payment is $5300/($32.93 per month) = 161 months (13.5
years) to recoup the higher closing costs, and thus
⎛ 0.04⎞ Choice 2 is the better option only if you intend to
$120, 000
12
PMT = = $572.90 , with no keep the house for at least 13.5 years.

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93 CHAPTER 4: MANAGING
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−12×30
⎛ 0.04 ⎞ 45. a. The monthly payment is
1 − ⎜1 + ⎟
⎝ 12 ⎠
⎛ 0.09⎞
$30, 000 ⎜
closing costs. For Choice 2, the payment is ⎝ 12 ⎟⎠
⎛ 0.03⎞ PMT = −12×20
= $269.92 .
=$120, 000 ⎛ 0.09⎞
⎜ ⎟ ⎝ ⎠ 1 − ⎜1+

PMT = 12 ⎟
= $505.92 , and the 12
−12×30
⎛ 0.03 ⎞ ⎝ ⎠
1 − ⎜1 + ⎟
⎝ 12 ⎠ b. The monthly payment is
closing costs are $1200 + $120,000(0.04) = $6000. ⎛ 0.09⎞
$30, 000

You’ll save $572.90 – $505.92 = $66.98 each 12

PMT = = $380.03 .
month with Choice 2, though it will take −12×10
⎛ 0.09 ⎞
$6000/($66.98 per month) = 90 months (7.5 years) 1 − ⎜1 + ⎟
⎝ 12 ⎠
to recoup the higher closing costs, and thus Choice
2 is the better option only if you intend to keep the
house for at least 7.5 years.

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94 CHAPTER 4: MANAGING
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MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 94

45. (continued) FURTHER APPLICATIONS

c. If you pay the loan off in 20 years, the total ⎛ 0.0375⎞
payments will be $269.92 × 12 × 20 = P
12
$64,780.80. If you pay it off in 10 years, the total 49. Solve $500 = for P by
−12×30
payments will be $380.03 × 12 × 10 = ⎛ 0.0375⎞
1− ⎜1+
$45,603.60.
⎝ 12 ⎠⎟
46. a. The monthly payment is computing the values in the numerator and
denominator on the right, and isolating P. This
⎛ 0.08⎞
$60, 000 results in P = $107,964 (rounded to the nearest
12
PMT = = $463.09 . dollar), and it represents the largest loan you can
−12×25
⎛ 0.08 ⎞ afford with monthly payments of $500. The loan
1 − ⎜1 + ⎟
⎝ 12 ⎠ will pay for 80% of the house you wish to buy
(you must come up with a 20% down payment).
b. The monthly payment is Thus 80% × (house price) = $107,964, which
⎛ 0.08⎞ means house price = $107,964 /0.80 = $134,956.

12 You can afford a house that will cost about

$60, 000 $134,956.
PMT = 12 = $573.39 .
−12×15
⎛ 0.08 ⎞ ⎛ 0.06 ⎞
1 − ⎜1 + ⎟ $200, 000
⎜⎝
⎝ 12 ⎠ ⎟ 12 ⎠
50. a. PMT = −12×30
= $1199.10.
1 − ⎛⎜1+ ⎞
c. If you pay the loan off in 25 years, the total 0.06
payments will be $463.09 × 12 × 25 = $138,927. ⎝ 12
If you pay it off in 15 years, the total payments
will be $573.39 × 12 × 15 = $103,210.20. ⎛ 0.055⎞
$186, 046
12
47. Following example 9 in the text, the interest on the b. PMT = −12×20
= $1279.79.
$150,000 loan in the first year will be approximately ⎛ 0.055⎞
1 − ⎜1+
4.5% × $150,000 = $6750, which means the ⎝ 12
monthly payment will be about
c. The total payout on the original loan would be
$6750/12 = $562.50. With the 3% ARM, the
$1199.10 × 360 = $431,676.
interest will be approximately 3% × $150,000 =
$4500, and thus the monthly payment will be d. The total payout with the refinancing plan
about $4500/12 = $375. You’ll save $562.50 – would be the total of the 60 payments at the
$375 = $187.50 each month with the ARM. In the original amount, the 240 payments at the new
third year, the rate on the ARM will be 2.0 amount, and the administrative costs. This would
percentage points higher than the fixed rate loan, be 60 × $1199.10 + 240 × $1279.79 + $2000 =
and thus the yearly interest payments will differ by $381,095.60.
$150,000 × 0.02 = $3000, which amounts to $250 e. The refinancing option leads to a lower total
per month. payout, but also to higher monthly payments. If
48. Following example 9 in the text, the interest on the the higher payments would not be a financial
$125,000 loan in the first year will be approximately hardship, the refinancing option would be the
4% × $125,000 = $5000, which means the better option. The homeowner might also want to
monthly payment will be about factor in the tax benefits of interest payments.
$5000/12 = $416.67. With the 2.5% ARM, the
51. a. The monthly payment for the first loan is
interest will be approximately 2.5% × $125,000 =
$3125, and thus the monthly payment will be ⎛ 0.065 ⎞
$10, 000 ⎜
about $3125/12 = $260.42. You’ll save about ⎝ 12 ⎠⎟
PMT = −12×15
= $87.11 .

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95 CHAPTER 4: MANAGING
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MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 95

1 − ⎛⎜1 + ⎞
$156.25 each month with the ARM. In the second 0.065
year, the rate on the ARM will be 1.5 percentage ⎝ 12
points higher than the fixed rate loan, and thus the The payments for the other two loans are
yearly interest payments will differ by $125,000 calculated similarly; you should get $116.30,
× 0.015 = $1875, which is about $156.25 per
$148.38, respectively.
month.

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MONEYPAYMENTS, CREDIT CARDS, AND MORTGAGES 96

51. (continued) 54. a. The monthly payment is $716.43 (see 53a).

b. For the first loan, you’ll pay $87.11 × 12 × 15 b. If each year you send 13 payments of $716.43
= $15,679.80 over its term. The total payments for to the bank, you will be making annual payments
the other loans are computed in a similar fashion – of $716.43 × 13 = $9313.59. This is equivalent to
you should get $27,912 and $17,805, respectively. making monthly payments of $9313.59/12 =
Add them together to get $61,397. $776.13. Using that amount as PMT in the loan
c. The monthly payment for the consolidated loan payment formula yields
⎛ 0.065⎞ ⎛ 0.06 ⎞
= $37,500 ⎝ =$100, 000 ⎝
⎜ ⎟ 12 ⎠ ⎜ ⎟ 12 ⎠
will be PMT = −12×15
= $326.67 , $776.13 = −12×Y
.
⎛ 0.065⎞ ⎛ 0.06 ⎞
1 − ⎜1 + 1 − 1+

⎝ 12 ⎠⎟ ⎝⎜ 12 ⎠⎟
and the total payment over 15 years will be To find out how long it will take to pay off the
$58,801. You’ll pay about $2596 less for the loan, we must solve for Y. The trick is to realize
consolidated loan ($61,397 – $58,801= $2596), this is an exponential equation, and solving such
and your monthly payments will be lower for the equations requires the use of logarithms (discussed
first ten years ($326.67 versus $87.11 + $116.30 + later in the text). Recall that the exponential
$148.38 = $351.79), but higher once the ten year expression must be isolated before taking the
loan is paid off. It would probably be worth it to logarithm of both sides. The steps are shown
consolidate the loans. It also means you’ll have to below (with units of dollars omitted; it is
keep track of only one loan instead of three, understood that Y is measured in years in the loan
though with automatic withdrawals offered by payment formula). Begin by cross-multiplying.
most banks, this isn’t as much of an issue today as
⎡ −12Y ⎤
it might have been 15 years ago. ⎛ 0.06 ⎞ ⎛ 0.06 ⎞
776.13 ⎢1− ⎜1 + ⎟ ⎥ = 100000 ⎜ ⎟
52. a. You’ll owe 22% × $2000 = $440. ⎝ 12 ⎠ ⎝ 12 ⎠
b. You’ll pay $440 × 12 = $5280.
⎡ ( )−12Y ⎤
c. The monthly payment for the loan would be 776.13 ⎣1− 1.005 ⎦ = 500 (simplify)
⎛ 0.10 ⎞
$2000
500
1− (1.005)−12Y = (divide by 776.13)
12
PMT = = $64.53 . This is 776.13
−12×3
⎛ 0.10 ⎞
1 − ⎜1 + ⎟ −(1.005)−12Y = −0.355... (subtract 1)
⎝ 12 ⎠
significantly lower than the amount owed to the (1.005) −12Y = 0.355... (divide by –1)
car-title lender.
−12Y log(1.005) = log(0.355...) (take logs)
53. a. The annual (n = 1) payment is $8718.46; the
monthly (n = 12) payment is $716.43, the bi- log(0.355...)
Y= = 17.3 years .
weekly (n = 26) payment is $330.43, and the weekly −12 log(1.005)
(n = 52) payment is $165.17. The weekly payment
is computed below; the others are done in a similar Another way to set up the problem is to imagine that
fashion. the 13 payments are sent to the bank at equal time
intervals over the course of the year. As with the
⎛ 0.06 ⎞ savings plan formula, the loan formula used in
$100, 000
52
PMT = = $165.17 . the text assumes the compounding period is equal

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97 CHAPTER 4: MANAGING
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−52×20
⎛ 0.06 ⎞ to the payment period (that is, if you send
1 − ⎜1 + ⎟ payments in 13 times per year, the bank
⎝ 52 ⎠
compounds interest 13 times per year). With these
b. The total payout for each scenario is as follows: assumptions, the problem boils down to solving
$174,369.20 (n = 1); $171,943.20 (n = 12); the following equation for Y:
$171,823.60 (n = 26); and $171,776.80. The total
payout when n = 52 is shown below; the others are ⎛ 0.06⎞
$100, 000
done in a similar fashion. 13
$716.43 = −13×Y
.

1− ⎜⎛1 + ⎞ ⎟
$165.17 52 weeks 0.06
× × 20 years = $171, 776.80 .
week year ⎝ 13 ⎠
c. The total payout decreases as n increases.

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91 CHAPTER 4: MANAGING MONEY UNIT 4E: INCOME TAXES 91

54. (continued) 64. a.

You can solve it following the same procedure as Month Interest Principal Balance
before, and you should find an answer that is $7500.00
virtually the same (it differs in the thousandths- 1 $56.25 $38.76 $7461.24
place).
2 $55.96 $39.05 $7422.19
Answers will vary. 3 $55.67 $39.34 $7382.85
55. 4 $55.37 $39.64 $7343.21
CHNOLOGY EXERCISES 5 $55.07 $39.94 $7303.27
6 $54.77 $40.24 $7263.04
TE a. PMT(0.09/12,12*10,7500) = $95.01
7 $54.47 $40.54 $7222.50
63. b. PMT(0.09/12,12*20,7500) = $67.48. 8 $54.17 $40.84 $7181.66
The payment decreases 9 $53.86 $41.15 $7140.51
c. PMT(0.045/12,12*10,7500) = $77.73. 10 $53.55 $41.46 $7099.05
The payment decreases. b. The interest paid in the first month of the loan is
$56.25 and $38.76 is paid towards the principle.
c. The interest paid in the last month of the loan is
$0.70 and $94.31 is paid towards the principle.

UNIT 4E
TIME OUT TO THINK not, they can discuss their own ideas about tax
reform. This would be a good topic for a
Pg. 256. Answers with regard to marginal tax rates
discussion either during or outside of class.
will depend on whether Congress has changed tax
rates since 2013. Regardless of rates, the
boundaries on the tax brackets should have QUICK QUIZ
changed because they are indexed to the CPI.
1. a. Gross income is defined as the total of all
Pg. 258. They pay different taxes because of their income you receive.
different filing statuses, which determine the
amounts of their deductions and their tax rates. In 2. c. The first portion of your income is taxed at 10%
Robert’s case, he also has extra exemptions for his (the portion being determined by your filing status
two children. Opinions will vary on the question – see Table 4.9), the next at 15%, and only the last
of whether the outcome is fair. This would be a good portion is taxed at 25%.
topic for a discussion either during or outside of 3. a. A tax credit reduces your tax bill by the dollar
class. amount of the credit, so your tax bill will be reduced
Pg. 259 (1st). Among the many factors are by $1000.
maintenance cost of the house versus the 4. b. A tax deduction reduces your taxable income,
apartment; utilities cost; whether you have the so if you have a deduction of $1000, and you are
savings necessary for the home down payment; in the 15% tax bracket, your bill will be reduced
whether you plan to live in the house short or by 15% of $1000, or $150. This answer assumes
long-term; whether you think the house is a good you are far enough into the 15% tax bracket so
investment; etc. that reducing your taxable income by $1000
Pg. 259 (2nd). Opinions will vary. This would be a means you remain in the 15% bracket.
good topic for a discussion either during or outside 5. b. You can claim deductions of $5000 + $2000 =
of class. $7000 as long as you itemize deductions.
Pg. 261. Serena pays more tax, but her tax rate is 6. a. If you chose to itemize your deductions, the
lower. With this example in mind, you can have only thing you can claim is the $1000
fun debating the fairness of the capital gains tax contribution, and as this is less than your standard
rates either during or outside of class. deduction of $6100, it won’t give relief to your tax
Pg. 262. Students should investigate whether any tax bill (in fact, you’d pay more tax it you were to
reforms have been implemented. If so, they can itemize deductions in this situation – take the
discuss the reforms and their opinions of them. If standard deduction).

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92 CHAPTER 4: MANAGING MONEY UNIT 4E: INCOME TAXES 92

7. c. FICA taxes are taxes levied on income from 18. Makes sense. The tax break that one enjoys with tax-
wages (and tips) to fund the Social Security and deferred investments results in a tax savings that
Medicare programs. ultimately affects take-home pay.
8. a. Joe will pay 7.65% of his income for FICA
taxes. Kim pays 7.65% of only her first $113,700; BASIC SKILLS AND CONCEPTS
she pays 1.45% of her remaining salary, for a total
FICA tax of 0.0765($113,700) + 0.0145($150,000 19. Antonio’s gross income was $47,200 + $2400 =
– $113,700) = $9224.40, which is 6.1% of her $49,600. His AGI was $49,600 – $3500 =
income. David pays nothing at all in FICA taxes $46,100. His taxable income was $46,100 – $3900
because income from capital gains is not subject to – $6100 = $36,100.
FICA taxes. 20. Marie’s gross income was $28,400 + $95 =
9. b. Assuming all are of the same filing status, $28,495, and her AGI was the same as she had no
Jerome pays the most because his FICA taxes will adjustments to income. Her taxable income was
$28,495 – $3900 – $6100 = $18,495.
be highest, followed by Jenny, and then
Jacqueline. 21. Isabella’s gross income was $88,750 + $4900 =
$93,650. Her AGI was $93,650 – $6200 =
10. c. Taxes on money deposited into tax-deferred
$87,450. Her taxable income was $87,450 – $3900
accounts are deferred until a later date: you don’t
– $9050 = $74,500.
have to pay taxes on that money now, but you will
when you withdraw the money in later years. 22. Lebron’s gross income was $3,452,000 + $54,200
= $3,506,200. His AGI was $3,506,200 – $30,000
= $3,476,200. His taxable income was $3,476,200
DOES IT MAKE SENSE? – $674,500 = $2,801,700. Lebron needs a good tax
11. Does not make sense. We know nothing of the rest lawyer.
of the picture for these two individuals – they may 23. Your itemized deductions total to $8600 + $2700
have very different deductions, and thus different + $645 = $11,945, and since this is smaller than
tax bills. the standard deduction of $12,200, you should claim
12. Does not make sense. If you care for a dependent the standard deduction and not itemize your
child, you earn the child tax credit, whether you deductions.
itemize deductions or not. 24. Your itemized deductions total to $3700 + $760 =
13. Makes sense. You can deduct interest paid on the $4460, and since this is less than the standard
mortgage of a home if you itemize deductions, and deduction of $6100, you should claim the standard
for many people, the mortgage interest deduction deduction and not itemize your deductions.
is the largest of all deductions. 25. Suzanne’s gross income is $33,200 + $350 =
14. Makes sense, because you only get a tax benefit from $33,550, her AGI is $33,550 – $500 = $33,050,
mortgage interest if you itemize your deductions, and her taxable income is $33,050 – $3900 –
not if you take the standard deduction. $6100 = $23,050. She should claim the standard
deduction because it is much higher than her
15. Makes sense (in some scenarios). Bob and Sue itemized deduction of $450.
might be hit with the “marriage penalty” when
26. Malcolm’s gross income and AGI are both
they file taxes, and if they postpone their wedding
$23,700, and his taxable income is $23,700 –
until the new year, they could avoid the penalty
$3900 – $6100 = $13,700. He should claim the
for at least the previous tax year.
standard deduction because it is higher than his
16. Makes sense, because Phil would be in the top itemized deduction of $4500.
39.8% tax bracket while Regina has the 20% 27. Wanda’s gross income was $33,400 + $500 =
maximum capital gains rate. (There will be some $33,900, her AGI was the same, and her taxable
additional differences due to FICA and the income was $33,900 – $3900 × 3 – $6100 =
Medicare tax, but Phil still pays nearly double the $16,100. She should claim the standard deduction
overall rate.) because it is higher than her itemized deduction of
17. Makes sense, because at $10,000 your personal $1500.
exemption and standard deduction would give you
$0 taxable income, but being self-employed means
you are still subject to the 15.3% self-employment
FICA tax.

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93 CHAPTER 4: MANAGING MONEY UNIT 4E: INCOME TAXES 93

28. Emily and Juan had a gross income of $75,300 + 41. His tax bill will be reduced by 28% of $1000, or
$2000 + $1650 = $78,950, their AGI was $78,950 $280, provided he is far enough into the 28%
– $3240 = $75,710, and their taxable income was bracket that his $1000 contribution does not drop
$75,710 – $3900 × 4 – $12,200 = $47,910. They him into the lower bracket.
should claim the standard deduction of $12,200 42. Her tax bill will be reduced by 39.6% of $1000, or
for married couples because it’s higher than their $396, provided she is far enough into the 39.6%
itemized deductions.
bracket that her $1000 contribution does not drop
29. Gene owes 10% × ($8925) + 15% × ($35,400 – her into the lower bracket.
$8925) = $ 4863.75 (Taxes are rounded to the
43. The $1800 per month of your payment that goes
nearest dollar, so the tax owed is $4864.)
toward interest would be deductible, which means
30. Sarah and Marco owe 10% × ($17,850) + 15% you’d save 33% × $1800 = $594 each month in
($72,500 – $17,850) + 25% × ($87,500 – taxes. Thus your $2000 mortgage payment would
$72,500) = $13,732.50. (Taxes are rounded to the effectively be only $2000 – $594 = $1406, which
nearest dollar, so the tax owed is $13,733.)
is less than your rent payment of $1600. Buying
31. Bobbi owes 10% × ($8925) + 15% × ($36,250 – the house is cheaper. This solution assumes that
$8925) + 25% × ($73,200 – $36,250) + 28% × the $1800 × 12 = $21,600 interest deduction
($77,300 – $73,200) = $15,256.75. (Taxes are would not drop you into the 28% bracket (if it did,
rounded to the nearest dollar, so the tax owed is the solution would be more complicated).
$15,257.)
44. The $600 per month of your payment that goes
32. Abraham owes 10% × ($8925) + 15% × toward interest would be deductible, which means
($23,800 – $8925) = $3123.75. (Taxes are you’d save 15% × $600 = $90 each month in
rounded to the nearest dollar, so the tax owed is taxes. Thus your $675 mortgage payment would
$3124.) effectively be only $675 – $90 = $585, which is less
33. Paul owes 10% × ($12,750) + 15% × ($48,600 – than your rent payment of $600. Buying the house
$12,750) + 25% × ($89,300 – $48,600) – $1000 is cheaper. This solution assumes that the
= $15,827.50. (Taxes are rounded to the nearest $600 × 12 = $7200 interest deduction would not
dollar, so the tax owed is $15,828.) drop you into the 10% tax bracket (if it did, the
34. Pat owes 10% × ($12,750) + 15% × ($48,600 – solution would be more complicated).
$12,750) + 25% × ($57,000 – $48,600) – $1000 45. Maria saves 33% of $10,000, or $3300 in taxes,
= $7752.50. (Taxes are rounded to the nearest which means the true cost of her mortgage interest
dollar, so the tax owed is $7753.) is $6700. Steve saves 15% of $10,000, or $1500 in
35. Winona and Jim owe 10% × ($17,850) + 15% × taxes, which means the true cost of his mortgage
($72,500 – $17,850) + 25% × ($105,500 – interest is $8500. This solution assumes their
$72,500) – $2000 = $16,232.50. (Taxes are deductions do not drop them into the lower tax
rounded to the nearest dollar, so the tax owed is bracket.
$16,233.)
46. Yolanna saves 35% of $4000, or $1400 in taxes,
36. Chris owes 10% × ($8925) + 15% × ($36,250 – which means the true cost of her contribution is
$8925) + 25% × ($73,200 – $36,250) + 28% × $2600. Alia saves 10% of $4000, or $400 in taxes,
($111,525 – $73,200) + 33% × ($127,300 – which means the true cost of her contribution is
$111,525) = $30,165.50. (Taxes are rounded to the $3600. This solution assumes Yolanna does not
nearest dollar, so the tax owed is $30,166.) drop into the 33% bracket as a result of her
37. Their bill will be reduced by $500. contribution.
38. Her bill will be reduced by $1500. 47. Luis will pay 7.65% × $28,000 = $2142 in FICA
39. Her taxes will not be affected because she is claiming taxes. His taxable income is $28,000 – $3900 –
$6100 = $18,000. He will pay 10% × ($8925) +
the standard deduction, and a $1000 charitable
15% × ($18,000– $8925) = $2254 in income
contribution must be itemized.
taxes, and thus his total tax bill will be $2142 +
40. His tax bill will be reduced by 15% of $1000, or $2254 = $4396. This is $4396/$28,000 = 15.7% of
$150, provided he is far enough into the 15% tax his gross income, so his effective tax rate is
bracket that his $1000 contribution does not drop 15.7%.
him into the lower bracket.

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94 CHAPTER 4: MANAGING MONEY UNIT 4E: INCOME TAXES 94

48. Carla will pay 7.65% × $34,500 = $2639 in FICA taxed at the special rates for dividends and long-
taxes. Her gross income is $34,500 + $750 = term capital gains. She will pay nothing in FICA
$35,250, and her taxable income is $35,250 – taxes, and her income taxes will be 0% ×
$3900 – $6100 = $25,250. She will pay 10% × ($36,250) + 15% × ($110,000 – $36,250) =
($8925) + 15% × ($25,250 – $8925) = $3341 in $11,063. Her overall tax rate is $11,063/$120,000
income taxes, and thus her total tax bill will be = 9.2%.
$2639 + $3341 = $5980. This is $5980.50/$35,250
54. Deion will pay 7.65% × $60,000 = $4590 in
= 17.0% of her gross income, so her effective tax FICA taxes, and because his taxable income is
rate is 17.0%. $60,000 – $3900 – $6100 = $50,000, he will pay
49. Jack will pay 7.65% × $44,800 = $3427 in FICA 10% × ($8925) + 15% × ($36,250 – $8925) +
taxes. His gross income is $44,800 + $1250 = 25% × ($50,000 – $36,250) = $8429 in income
$46,050, and his taxable income is $46,050 – taxes. His total tax bill is $4590 + $8429 =
$3900 – $6100 = $36,050. He will pay 10% × $13,019, so his overall tax rate is $13,019/$60,000
($8925) + 15% × ($36,050 – $8925) = $4961 in = 21.7%. Like Deion, Josephina’s taxable income
income taxes, and thus his total tax bill will be is $60,000, but she is taxed at the special rates for
$34270 + $4961 = $8388. This is $8388/$46,050 = dividends and long-term capital gains. Josephina
18.2% of his gross income, so his effective tax rate will pay nothing in FICA taxes, and her income
is 18.2%. taxes will be 0% × ($36,250) + 15% ×
50. Alejandro will pay 7.65% × $113,700 + 1.45% ($120,000 – $50,000) = $2063. Her overall tax
× ($115,200 – $113,700) = $8720 in FICA taxes. rate is $2063/$60,000 = 3.4%.
His gross income is $115,200 + $4450 = 55. Because you are in the 15% tax bracket, every
$119,650, and his taxable income is $119,650 – time you make a $400 contribution to your tax-
$3900 – $6100 = $109,650. He will pay 10% × deferred savings plan, you save 15% × $400 =
($8925) + 15% × ($36,250 – $8925) + 25% × $60 in taxes. Thus your take-home pay is reduced
($87,850 – $36,250) + 28% × ($109,650 – not by $400, but by $340.
$87,850) = $23995 in income taxes, and thus his
total tax bill will be $8720 + $23995 = $32,715. 56. Because you are in the 25% tax bracket, every
This is $32,715/$119,650 = 27.3% of his gross time you make a $600 contribution to your tax-
income, so his effective tax rate is 27.3%. deferred savings plan, you save 25% × $600 =
$150 in taxes. Thus your take-home pay is reduced
51. Brittany will pay 7.65% × $48,200 = $3687 in
not by $600, but by $450.
FICA taxes. Her taxable income is $48,200 –
$3900 – $6100 = $38,200. She will pay 10% × 57. Because you are in the 25% tax bracket, every
($8925) + 15% × ($36,250 – $8925) + 25% × time you make an $800 contribution to your tax-
($38,200 – $36,250) = $5479 in income taxes, and deferred savings plan, you save 25% × $800 =
thus her total tax bill will be $3687 + $5479 = $200 in taxes. Thus your take-home pay is reduced
$9166. This is $9166/$48,200 = 19.0% of her not by $800, but by $600.
gross income, so her effective tax rate is 19.0%. 58. Because you are in the 28% tax bracket, every
52. Larae will pay 7.65% × $21,200 = $1622 in time you make an $800 contribution to your tax-
FICA taxes. Her taxable income is $21,200 – deferred savings plan, you save 28% × $800 =
$224 in taxes. Thus your take-home pay is reduced
$3900 – $6100 = $11,200. She will pay 10% ×
($8925) + 15% × ($11,200 – $8925) = $1234 in not by $800, but by $576.
income taxes, and thus her total tax bill will be
$1622 + $1234 = $2856. This is $2856/$21,200 = FURTHER APPLICATIONS
13.5% of her gross income, so her effective tax
rate is 13.5%. 59. Gabriella’s taxable income is $96,400 – $3900 –
$6100 = $86,400, so her income tax is 10% ×
53. Pierre will pay 7.65% × ($113,700) + 1.45% ×
($8925) + 15% × ($36,250 – $8925) + 25% ×
($120,000 – $113,700) = $8789 in FICA taxes,
and because his taxable income is $120,000 – ($86,400 – $36,250) = $17,528.75. Roberto’s
$3900 – $6100 = $110,000, he will pay 10% × taxable income is $82,600 – $3900 – $6100 =
($8925) + 15% × ($36,250 – $8925) + 25% × $72,600, so his income tax is 10% × ($8925) +
($87,850 – $36,250) + 28% × ($110,000 – 15% × ($36,250 – $8925) + 25% × ($72,600 –
$87,850) = $24,093 in income taxes. His total tax $36,250) = $14,078.75. If they delay their
bill is $8789 + $24,093 = $32,882, so his overall marriage, they will pay $17,528.75 + $14,078.75 =
tax rate is $32882/$120,000 = 27.4%. Like Pierre, $31,607.50 in taxes. If they marry, their combined
Katarina’s taxable income is $110,000, but she is AGI will be $96,400 + $82,600 = $179,000, and

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95 CHAPTER 4: MANAGING MONEY UNIT 4E: INCOME TAXES 95

59. (continued) 63. a. Deirdre will pay 7.65% × ($90,000) = $6885 in

their taxable income will be $179,000 – $3900 × FICA taxes. Robert will also pay $6885 in FICA
2 – $12,200 = $159,000. Their income taxes will taxes. Jessica and Frank will pay 2 × ($6885) =
be 10% × ($17,850) + 15% × ($72,500 – $13,770 in FICA taxes.
$17,850) + 25% × ($146,400 – $72,500) + 28% b. From Example 3, Deirdre will pay $15,929 +
× ($159,000 – $146,400) = $31,985.50, which is $6885 = $22,814, Robert will pay $11,840 +
slightly higher than the taxes they would pay as $6885 = $18,725, and Jessica and Frank will pay
individuals, and thus they will face a marriage $32,266 + $13,770 = $46,036.
penalty. c. Deirdre’s overall tax rate:
60. Joan’s taxable income is $32,500 – $3900 – $6100
$22,814
= $22,500, so her income tax is 10% × ($8925) + = 25.3%
15% × ($22,500 – $8925) = $2928.75. Paul’s $90, 000
taxable income is $29,400 – $3900 – $6100 = Robert’s overall tax rate:
$19,400, so his income tax is 10% × ($8925) +
$18,725
15% × ($19,400 – $8925) = $2463.75. If they = 20.8%
delay their marriage, they will pay $2928.75 + $90, 000
$2463.75 = $5393 in taxes. If they marry, their Jessica and Frank’s overall tax rate:
combined AGI will be $32,500 + $29,400 =
$46, 036
$61,900, and their taxable income will be $61,900 = 25.6%
– $3900 × 2 – $12,200 = $41,900. Their income $180, 000
taxes will be 10% × ($17,850) + 15% × d. Serena had the lowest overall tax rate, following
($41,900 – $17,850) = $5393, which is the same by Robert, Deirdre, and Jessica and Frank, in
amount they would pay as individuals, and thus ascending order.
they will not face a marriage penalty. e. Serena receives by far the greatest tax break
61. Steve’s taxable income is $185,000 – $3900 – because all of her income is from investments.
$6100 = $175,000, so his income tax is 10% × 64. a. The secretary’s taxable income is $200,000 –
($8925) + 15% × ($36,250 – $8925) + 25% × $3900 – $6100 = $190,000. Her income tax is
($87,850 – $36,250) + 28% × ($175,000 – 10% × ($8925) + 15% × ($36,250 – $8925) +
$87,850) = $42,293.25. Mia’s tax is, of course, the 25% × ($87,850 – $36,250) + 28% × ($183,250
same, so if they delay their marriage, they will pay – $87,850) + 33% × ($190,000 – $183,250) =
$84,587. If they marry, their combined AGI will $46,831. She will pay 7.65% × ($113,700) +
be $185,000 × 2 = $370,000, and their taxable 1.45% × ($200,000 – $113,700) = $9949 in FICA
income will be $370,000 – $3900 × 2 – $12,200 taxes. Her total tax bill is $46,831 + $9949 =
= $350,000. Their income taxes will be 10% × $56,780, so her overall tax rate is
($17,850) + 15% × ($72,500 – $17,850) + 25% $56,740/$200,000 = 28.4%. For 2012, Buffett’s
× ($146,400 – $72,500) + 28% × ($223,050 – rate was lower by 13.4 percentage points. For
$146,400) + 33% × ($350,000 – $223,050) = 2013, Buffett’s rate was lower by 4.6 percentage
$91,813, which is more than the taxes they would points.
pay as individuals, and thus they will face a b. The waitress’s taxable income is $22,000 –
marriage penalty. $3900 – $6100 = $12,000. Her income tax is 10%
62. Lisa’s taxable income is $85,000 – $3900 – $6100 × ($8925) + 15% × ($12,000 – $8925) = $1354.
= $75,000, so her income tax is 10% × ($8925) + She will pay 7.65% × ($22,000) = $1683 in FICA
15% × ($36,250 – $8925) + 25% × ($75,000 – taxes. Her total tax bill is $1354 + $1683 = $3037,
$36,250) = $14,679. Patrick pays no income tax, so her overall tax rate is $3037/$22,000 = 13.8%.
so if they delay their marriage, they will pay For 2012, Buffett’s rate was slightly higher, by 1.2
$14,679. If they marry, their combined AGI will percentage points. For 2013, Buffett’s rate was
be $85,000, and their taxable income will be higher by 10.0 percentage points.
$85,000 – $3900 × 2 – $12,200 = $65,000. Their
income taxes will be 10% × ($17,850) + 15% ×
($65,000 – $17,850) = $8858, which is lower than
the taxes they would pay as individuals, and thus
they will not face a marriage penalty. In fact,
they’ll benefit from becoming married.

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96 CHAPTER 4: MANAGING MONEY UNIT 4E: INCOME TAXES 96

64. (continued) d. The business woman’s taxable income is

c. The teacher’s taxable income is $56,000 – $110,000 – $3900 – $6100 = $100,000. Her
$3900 – $6100 = $46,000. Her income tax is 10% income tax is 10% × ($8925) + 15% × ($36,250
× ($8925) + 15% × ($36,250 – $8925) + 25% × – $8925) + 25% × ($87,850 – $36,250) + 28% ×
($46,000 – $36,250) = $7429. She will pay 7.65% ($100,000 – $87,850) = $21,293. She will pay 2
× ($56,000) = $4284 in FICA taxes. Her total tax × 7.65% × ($110,000) = $16,830 in FICA taxes,
bill is $7429 + $4284 = $11,713, so her overall tax since she also pays the employer share. Her total tax
rate is $11,713/$56,000 = 20.9%. For 2012, bill is $21,293 + $16,830 = $38,123, so her overall
Buffett’s rate was lower by 5.9 percentage points. tax rate is $38,123/$110,000 = 34.7%. For
For 2013, Buffett’s rate was higher by 2.9 2012, Buffett’s rate was lower by 19.7 percentage
percentage points. points. For 2013, Buffett’s rate was lower by 10.9
percentage points.
65. – 68. Answers will vary.

UNIT 4F
TIME OUT TO THINK Pg. 277. Opinions will vary. This would be a good
topic for a discussion either during or outside of
Pg. 268. Rising debt means a greater likelihood that
class. Topics could include the risks associated
the company won’t succeed, so getting further
with private savings accounts.
loans will depend on convincing lenders that the
company will eventually become profitable and be
able to pay back the loans. QUICK QUIZ
Pg. 270. For most people, the answer depends on 1. b. Bigprofit.com had more outlays (expenses) than
whether they own a home. For homeowners, who receipts (income) by $1 million, so it ran a deficit
generally owe most of the value of their home to a for 2009 of $1 million. Its debt is the total amount
bank, $54,000 is usually small in comparison. For owed to lenders over the years; this is $7 million.
others, including students, their share of the national
debt generally is larger than personal debts. 2. c. The federal debt is about $17 trillion dollars,
and when divided evenly among all 315 million
Pg. 271. Opinions will vary. This would be a good U.S. citizens, it comes to about $54,000 per
topic for a discussion either during or outside of person.
class.
3. c. Tax revenues are below average.
Pg. 273 (1st). Answers will depend on the program
that students choose. This would be a good topic 4. b. Discretionary outlays differ from mandatory
for a discussion either during or outside of class. outlays in that Congress passes a budget every
year that spells out where the government will spend
Pg. 273 (2nd). Students will need to search for recent its discretionary funds.
legislation affecting entitlement spending, and
discuss changes or proposed changes. This would be 5. a. Interest on the debt must be paid so that the
a good topic for a discussion either during or outside government does not default on its loans, and
of class. Medicare is an entitlement program that is part of
mandatory spending. On the other hand, all money
Pg. 274. Leaving entitlement spending untouched for spent on defense is considered discretionary
current retirees would cause fewer complaints spending.
from older voters, who would see immediate
effects from spending cuts. Politicians like this 6. a. Mandatory expenses include money spent on
plan because it means older voters (who tend to vote Social Security, Medicare, interest on the debt,
in higher proportion than younger people) will be government pensions, and Medicaid, and together
less likely to be upset by the changes. Of course, these programs constitute almost 60% of the
this means younger people will be affected by the budget (see Figure 4.14).
changes. How it affects you will depend on your 7. b. The $100 billion is supposed to be deposited
age. into an account used to pay off future Social
Security recipients, but instead, the government
spends the money at hand, and essentially writes
IOUs to itself, and places these in the account.

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97 CHAPTER 4: MANAGING MONEY
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97

8. b. Publicly held debt is the money the government c. Your receipts will be $39,140 (see part b), and
owes to those who have purchased Treasury bills, your outlays will be $27,700 × 1.01 + $7500 =
notes, and bonds. $35,477, so you will be able to afford it.
9. b. The gross debt is the sum of all of the money 16. a. Your receipts are $28,000, and your outlays are
that the government owes to individuals who have $8,000 + $4500 + $1600 + $10,400 = $24,500, so
purchased bonds, and the money it owes to itself. you have a surplus.
10. c. The amount of money set aside for education b. A 2% raise means your receipts would be
grants is miniscule in comparison to the billions of $28,000 + 2% × $28,000 = $28,560, and your
dollars the government will be required to spend outlays would be $24,500 + $5200 = $29,700, so
on Social Security in 2030. you could not afford to pay off all of the debt.
c. Your receipts will be $28,560 (see part b), and
your outlays will be $24,500 × 1.01 + $3500 =
DOES IT MAKE SENSE? $28,245, so you will be able to afford it.
9. Makes sense. Each U.S. citizen would have to 17. a. The interest on the debt will be 8.2% ×
spend about $43,000 to retire the federal debt, and $773,000 = $63,000 (rounded to the nearest
it’s certainly true that this exceeds the value of thousand dollars).
most new cars. b. The total outlays are $600,000 + $200,000 +
10. Does not make sense. In 2013, the federal outlays $250,000 + $63,000 = $1,113,000, so the year-end
were $3.5 trillion, and 6% of that (Figure 4.14) went deficit is $1,050,000 – $1,113,000 = –$63,000,
toward the government’s annual interest payment and the year-end accumulated debt is –$773,000 –
on the debt, which means around $210 billion was $63,000 = –$836,000.
spent on interest for the debt. Divide that by 315 c. The interest on the debt in 2015 will be 8.2% ×
million U.S. citizens, and you get about $667. $836,000 = $69,000 (rounded to the nearest
This is not enough to buy a new car. thousand dollars).
11. Does not make sense. The financial health of the d. The total outlays are $600,000 + $200,000 +
government is very much dependent upon what $69,000 = $869,000, so the year-end surplus is
happens with Social Security and the FICA taxes $1,100,000 – $869,000 = $231,000, and the year-
collected to fund it. The term “off-budget” is end accumulated debt is –$836,000 + $231,000 =
nothing more than a label that separates the Social –$605,000, assuming all surplus is devoted to
Security program from the rest of the budget. paying down the debt.
12. Makes sense. When receipts are more than 18. a. The interest on the debt will be 8.2% ×
outlays, the government ran a surplus for that year, $773,000 = $63,000 (rounded to the nearest
but the debt may increase anyway, for a variety of thousand dollars).
reasons. Among them: the government claims to b. The total outlays are $850,000 + $290,000 +
be running a surplus when the on-budget net income $210,000 + $63,000 = $1,413,000, so the year-end
is positive even though it also spends off- budget deficit is $975,000 – $1,413,000 = –$438,000, and
(i.e. Social Security) funds; and the total debt may the year-end accumulated debt is –$773,000 –
increase because of the huge amount of interest $438,000 = –$1,211,000.
owed to holders of Treasury bills.
c. The interest on the debt in 2011 will be 8.2% ×
13. Does not make sense. There is no guarantee the $1,211,000 = $99,000 (rounded to the nearest
government will have the funds to pay for social thousand dollars).
security 40 years from now.
d. The total outlays are $850,000 + $290,000 +
14. Does not make sense. The majority of government $99,000 = $1,239,000, so the year-end deficit is
spending is in non-discretionary spending. $1,050,000 – $1,239,000 = –$189,000, and the year-
end accumulated debt is –$1,211,000 –
$189,000 = –$1,400,000.
BASIC SKILLS AND CONCEPTS
13
15. a. Your receipts are $38,000, and your outlays are
$1.61 ×10 $94,706
$12,000 + $6000 + $1200 + $8500 = $27,700, so 19. =

you have a surplus. 170 ×106 workers worker

b. A 3% raise means your receipts will be $38,000 13
$1.61×10 $140,000

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98 CHAPTER 4: MANAGING MONEY
UNIT 4F: UNDERSTANDING THE FEDERAL BUDGET
98
+ 3% × $38,000 = $39,140, and your outlays will 20. =
be $27,700 + $8500 = $36,200, so you’ll still have 115 ×106 households household
a surplus, though it will be smaller.

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99 CHAPTER 4: MANAGING MONEY
UNIT 4F: UNDERSTANDING THE FEDERAL BUDGET
99

$236 ×109 28. Discretionary spending was 19% + 16% = 35% of

21. 2000 Surplus: = 2.4% spending or 35% × $3.5 trillion = $1.23 trillion.
$9821×109
Non-discretionary spending was $3.5 trillion –
$5500 ×109 ($1.23 trillion) = $2.27 trillion.
2000 Debt: = 56.0%
$9821×109 29. Spending would increase by 1.6% × $3.5 trillion
= $0.056 trillion or $56 billion, while revenue
−$1412 ×109 would increase by 2% × $2.9 trillion = $0.058
2009 Deficit: = 10.1%
$13,937 ×109 trillion or $58 billion, so it would be possible.
30. The deficit in 2013 was $2.9 trillion – 3.5 trillion
$12, 000 ×109 = –$0.6 trillion. In 2014 spending would decrease
2009 Debt: = 86.1%
$13,937 ×109 to 98% × $3.5 trillion = $3.43 trillion, while
revenue would increase to 102% × $2.9 trillion =
22. The debt increased by ($12,000 × 109 –
$2.96 trillion. The deficit would be $2.96 trillion –
$5500 × 109) / ($5500 × 109) = 118.2%. Using the
values from Exercise 21, debt as percentage of 3.43 trillion = –$0.47 trillion, which is a decrease
GDP increased by (86.1% – 56.0%) / 56.0% = from 2013.
53.8%. The values are different because the 31. Spending on Social Security and Medicare
second percentage also includes the overall change increases by 39% – 33% = 6%, which is 6% ×
in GDP. $3.5 trillion = $0.21 trillion or $210 billion. Non-
discretionary spending would decrease by the
−$1412 ×109 same values.
23. 2009 Deficit: = 10.1%
$13,937 ×109 32. The current revenue from individual income tax
−$480 ×109 revenue is 47% × $2.9 trillion = $1.363 trillion.
2017 Deficit: = 2.4% Revenue from individual income tax revenue
$20, 000 ×109 would increase by 5% × $2.9 trillion = $0.145
This is a change of (2.4% – 10.1%)/10.1% trillion, to $1.363 trillion + $0.145 trillion =
= –76%. $1.508 trillion. This is an increase of $0.145
trillion/($1.363 trillion) = 10.6%.
$12, 000 ×109
33. Because unified net income – off-budget net
24. 2009 Debt: = 86.1%
$13,937 ×109 income = on-budget net income, we have $40
$19, 500 ×10 9 billion – $180 billion = –$140 billion. In other
words, despite the fact that the government
2017 Debt: = 97.5% × $2.9 trillion = $1.36 trillion. Revenue from
$20, 000 ×109 social insurance was 34% × $2.9 trillion = $0.986
This is a change of (97.5% – 86.1%) / 86.1% = trillion or $986 billion.
13.2%.
25. At 2.1%, the interest payment would be 2.1% ×
$20 trillion = $420 billion. With the 0.5%
increase, the interest payment would be 2.6% ×
$20 trillion = $520 billion. The increase in the
interest rate is (2.6% – 2.1%) / 2.1% = 24%, which
would be the same increase as the interest
payment.
26. At 2.1%, the interest payment would be 2.1% ×
$20 trillion = $420 billion. With the 1% increase,
the interest payment would be 3.1% × $20 trillion
= $620 billion. The increase in the interest rate is
(3.1% – 2.1%) / 2.1% = 48%, which would be the
same increase as the interest payment.
27. Revenue from individual income taxes was 47%

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 100 CHAPTER 4: MANAGINGUNIT
MONEY4F: UNDERSTANDING THE FEDERAL BUDGET
100
proclaimed a surplus of $40 billion for this year, it
actually ran a deficit of $140 billion due to the fact
that the money earmarked for the Social Security
trust fund was never deposited there (it was spent on
other programs).
34. Because unified net income – off-budget net
income = on-budget net income, we have –$220
billion – $205 billion = –$425 billion. In other words,
despite the fact that the government proclaimed a
deficit of $220 billion for this year, it actually ran a
deficit of $425 billion due to the fact that the money
earmarked for the Social Security trust fund was
never deposited there (it was spent on other
programs).
35. The government could cut discretionary spending, it
could borrow money by issuing Treasury notes, or it
could raise taxes (of course, a combination of these
three would also be an option).
36. The government could cut discretionary spending, it
could borrow money by issuing Treasury notes, or it
could raise taxes (of course, a combination of these
three would also be an option).

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101 CHAPTER 4: MANAGINGUNIT
MONEY4F: UNDERSTANDING THE FEDERAL BUDGET
101

FURTHER APPLICATIONS 42. In 2017, federal revenue would be 104% × $2.45

trillion = $2.55 trillion, and federal spending
37. It would take about $1.7 ×1013 would be 104% × $3.54 trillion = $3.68 trillion.
1s 1 hr 1d 1 yr This would result in a deficit in 2017 of $2.55
× × × × ≈ 539,00 years.
$1 3600 s 24 hr 365 d trillion – $3.68 trillion = –$1.13 trillion. In 2012,
the federal deficit was $2.45 trillion – $3.54
38. $17 trillion would cover about $1.7 ×1013 trillion = –$1.09 trillion, so the deficit will have

2 increased.
100 cm 2 ⎛ 1 km ⎞
2
× ×⎜ ⎟ = 170, 000 km . ⎛ 0.04⎞
$1 ⎝100,000 cm ⎠ $12.0 ×1012 ⎜
⎝ 1 ⎠⎟ 12
2 PMT = −1×10
= $1.48 ×10 , which
170, 000 km ⎛ 0.04 ⎞
43.
This is = 1.7% of the area of the
10,000,000 km 2 1− ⎜1+ ⎟
⎝ 1 ⎠

United States. is $1.48 trillion per year.

39. In ten years, the debt will be
12 ⎛ 0.02⎞
$12.0 ×10 ⎜
13
$1.7 ×10 (1+ 0.01) 10 13
= $1.88 ×10 , ⎝ 1 ⎠⎟ 11

44. PMT = −1×15

= $9.34 ×10 , which
or about $18.8 trillion. In 50 years, it will be ⎛ 0.02 ⎞
1− ⎜1 +
⎝ 1
$1.7 ×1013 (1+ 0.01)50 = $2.8 ×1013 ,
is $934 billion per year.
or about $28 trillion.
1 wk 1 yr
40. In ten years, the debt will be 45. $17 ×1012 × × = 2043 years .
$160 ×106 52 wk

$1.7 ×1013 (1+ 0.02)10 = $2.07 ×1013 , 46. The annual revenue required from the lottery
or about $20.7 trillion. In 50 years, it will be would be $17 trillion/50 = $340 billion, though
this means annual lottery sales would need to be
$1.7 ×1013 (1+ 0.02)50 = $4.58 ×1013 , $680 billion (because only half of the proceeds go
or about $45.8 trillion. toward reduction of the debt). Divide $680 billion
41. In 2017, federal revenue would be 154% × $2.45 by 315 million citizens to find that each citizen
trillion = $3.773 trillion, and federal spending would would need to spend about $2160 per year in
be 120% × $3.54 trillion = $4.248 trillion. This lottery tickets. An interesting result of such a
would result in a deficit in 2017 of $3.773 trillion – massive lottery is that there would be a number of
$3.248 trillion = –$0.475 trillion. In very rich people at the end of the 50-year lottery
2012, the federal deficit was $2.45 trillion – $3.54 experiment: roughly $17 trillion in prize money
trillion = –$1.09 trillion, so the deficit will have would be distributed. In fact, if a random citizen
decreased. were chosen every day (for 50 years) to be the
lottery winner for the day, that person would win
about $900 million.

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