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by him1985 » Tue Feb 28, 2012 9:12 am
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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by [email protected] » Tue Feb 28, 2012 9:38 am
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
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by GMATGuruNY » Tue Feb 28, 2012 10:22 am
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
ALWAYS LOOK AT THE ANSWER CHOICES.
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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by krusta80 » Tue Feb 28, 2012 3:12 pm
GMATGuruNY wrote:
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
ALWAYS LOOK AT THE ANSWER CHOICES.
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!
How do we know that the 10% return is applied after the first year?
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by GMATGuruNY » Tue Feb 28, 2012 9:48 pm
krusta80 wrote:
GMATGuruNY wrote:
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
ALWAYS LOOK AT THE ANSWER CHOICES.
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!
How do we know that the 10% return is applied after the first year?
The problem states that the note earns a 10% return ON PURCHASE.
In other words, when the note is purchased, it immediately earns 10% interest.
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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].
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