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1)You have just purchased a new warehouse
1)You have just purchased a new warehouse. To finance the purchase, you've arranged for a 25-year mortgage for the $1,440,000 purchase price. The monthly payment on this loan will be $10,600. What is the EAR?
2)you plan to save $500 monthly for 2 years earning 5%interest. how much will you end up with?
3)Bond A and Bond B are zero-coupon bonds issued by the same government. Bond A is due to mature in exactly t years from today, and Bond B is due to maturity in exactly T years from today (t<T). If the zero rate curve (for the government bonds) is downward sloping, which of the following statements is correct?
A. Since there two bonds are issued by the same government, the yield of Bond A is the same as the yield of Bond B
B. The yield on A is smaller than the yield on B
C. The yield on B is smaller than the yield on A
D. Not enough information to judge whet
her the yield of Bond A is larger or smaller than the yield if Bond B
Expert Solution
1)
Answer : To calculate EAR , we first need to calculate Monthly Rate of Interest :
Using Rate function of Excel :
=RATE(nper,pmt,pv,fv)
where
nper is the number of payments i.e 25 * 12 = 300 (Multiplied by 12 as Monthly payment)
pmt is the periodic payment i.e 10600
pv is the amount borrowed i.e 1,440,000
fv is the future value i.e 0
=RATE(300,10600,-1440000,0)
Monthly Rate is 0.6213% or 0.006213
EAR = [( 1 + Monthly rate)^12 - 1]
= [(1.006213)^12 - 1]
= 1.077158 -1
= 0.077158 or 7.72%
2)
Monthly Saving = $500
Let us assume that saving is made at the start of each month
Annual Interest Rate = 5%
Monthly Interest Rate = Annual Interest Rate/12 = 5%/12 = 0.4167%
Investment Period = 2 years = 24 months
The future value of savings after 2 years can be calculated using the FV formula in spreadsheet
FV(rate, number of periods, payment amount, present value, when-due)
Where, rate = monthly interest rate = 0.4167%
number of periods = 24
payment amount = Monthly saving = $500
present value = present value of investments = 0
when-due = when is the saving made each month = beginning = 1
The future value of savings after 2 years = FV(0.4167%, 24, 500, 0, 1) = $12,645.48
3)
A down-sloped yield curve indicates an expectation of lower rates in the future, which is yields on longer-term bonds, may continue to fall, corresponding to periods of economic recession. a downward sloping .
Bond A is due to mature in exactly t years from today, and Bond B is due to maturity in exactly T years from today (t<T).
Maturity of Bond B is greater than maturity of Bond A. Hence, the yield on B is smaller than the yield on A.
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