The mayor of P-town won big at the Blackjack tables in Las Vegas, and she’s looking to invest her winnings for the town’s benefit.
P-town needs a new fire truck, but the town can’t afford it. This year, the truck costs $800,000. The mayor won $600,000 in Vegas and invested it all in U.S. Treasury bonds.
- (a) Assuming the truck price doesn’t change, and the treasury bonds have an annual interest rate of 2.5 percent, compounded monthly, how long will it take the mayor to have enough money to buy the truck?
- (b) Now assume the truck’s price increases 1 percent per year. If the mayor made the same investment as in part (a), how long will it take to gain the money to buy the truck?