A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?
1. 6000
2. 6048
3. 6100
4. 6150
5. 6200
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My understanding of how the problem can be solved:
Let x be the variable we need to calculate. Principal after 1st year= 1.1x
For 2nd year return = 1.1x (1+5/100)^1
Now, the return is 6430 + 500 ( deducted for early redemption)
Hence: 1.1x(1+5/100)^1=6930
x= $ 6000
Let x be the variable we need to calculate. Principal after 1st year= 1.1x
For 2nd year return = 1.1x (1+5/100)^1
Now, the return is 6430 + 500 ( deducted for early redemption)
Hence: 1.1x(1+5/100)^1=6930
x= $ 6000
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GMATGuruNY
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ALWAYS LOOK AT THE ANSWER CHOICES.him1985 wrote:A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?
1. 6000
2. 6048
3. 6100
4. 6150
5. 6200
Since the value of the note after two years is a multiple of 10, the initial investment must be a multiple of 1000; otherwise, when 5% interest is calculated after the first year, the resulting amount of interest will NOT be a multiple of 10.
The correct answer is A.
Answer choice A: 6000
Amount at the end of the first year = 600 + .1(600) = 6600.
Amount at the end of the second year = 6600 + .05(6600) = 6930.
Amount after the early redemption penalty = 6930-500 = 6430.
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krusta80
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How do we know that the 10% return is applied after the first year?GMATGuruNY wrote:ALWAYS LOOK AT THE ANSWER CHOICES.him1985 wrote:A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?
1. 6000
2. 6048
3. 6100
4. 6150
5. 6200
Since the value of the note after two years is a multiple of 10, the initial investment must be a multiple of 1000; otherwise, when 5% interest is calculated after the first year, the resulting amount of interest will NOT be a multiple of 10.
The correct answer is A.
Answer choice A: 6000
Amount at the end of the first year = 600 + .1(600) = 6600.
Amount at the end of the second year = 6600 + .05(6600) = 6930.
Amount after the early redemption penalty = 6930-500 = 6430.
Success!
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GMATGuruNY
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- Joined: Tue May 25, 2010 12:04 pm
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The problem states that the note earns a 10% return ON PURCHASE.krusta80 wrote:How do we know that the 10% return is applied after the first year?GMATGuruNY wrote:ALWAYS LOOK AT THE ANSWER CHOICES.him1985 wrote:A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?
1. 6000
2. 6048
3. 6100
4. 6150
5. 6200
Since the value of the note after two years is a multiple of 10, the initial investment must be a multiple of 1000; otherwise, when 5% interest is calculated after the first year, the resulting amount of interest will NOT be a multiple of 10.
The correct answer is A.
Answer choice A: 6000
Amount at the end of the first year = 600 + .1(600) = 6600.
Amount at the end of the second year = 6600 + .05(6600) = 6930.
Amount after the early redemption penalty = 6930-500 = 6430.
Success!
In other words, when the note is purchased, it immediately earns 10% interest.
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I have worked with students based in the US, Australia, Taiwan, China, Tajikistan, Kuwait, Saudi Arabia -- a long list of countries.
My students have been admitted to HBS, CBS, Tuck, Yale, Stern, Fuqua -- a long list of top programs.
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I unlock the best way for YOU to solve problems.
For more information, please email me (Mitch Hunt) at [email protected].
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Followed here and elsewhere by over 1900 test-takers.
I have worked with students based in the US, Australia, Taiwan, China, Tajikistan, Kuwait, Saudi Arabia -- a long list of countries.
My students have been admitted to HBS, CBS, Tuck, Yale, Stern, Fuqua -- a long list of top programs.
As a tutor, I don't simply teach you how I would approach problems.
I unlock the best way for YOU to solve problems.
For more information, please email me (Mitch Hunt) at [email protected].
Student Review #1
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Student Review #3
