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Homework answers / question archive / University of West Georgia FINC MISC Chapter 4 1)As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan)

University of West Georgia FINC MISC Chapter 4 1)As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan)

Finance

University of West Georgia

FINC MISC

Chapter 4

1)As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

  1. If the compound period is greater than one
  2. Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?
  3. A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is CORRECT?

 

  1. What is the future value of a 5-year ordinary annuity with annual payments of $ 994 , evaluated at a 9.19 percent interest rate? Enter your answer to the nearest $.01. Do not use $ or , signs in your answer. Enter your answer as a positive number.
  2. Assume that you have a lump sum $ 221 that you are investing for 4 years at a nominal rate of 22 %. What is the expected Future Value? Enter your answer to the nearest $.01. Do not use $ or , signs in your answer. Enter your answer as a positive number.
  3. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?
  4. You are planning on taking a loan for $ 52 ,000. You will repay the loan in annual payments over the next 7 years and the loan has a stated interest rate of 7 %. For the very last payment on your loan, how much of this is repayment of principal? For example, if the loan payment is $400 of which $30 is interest and $370 is principal, your answer is $370. Enter your answer to the nearest $.01. Do not use $ or , signs in your answer. Enter your answer as a positive number.
  5. You are considering buying a new car. The sticker price is $15,000 and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10 percent and you wish to pay for the car over a 5-year period, what are your monthly car payments?
  6. Given an interest rate of 8 percent per year, what is the value at date t = 9 of a perpetual stream of $500 annual payments that begins at date t = 17?
  7. Your holiday ski vacation was great, but it unfortunately ran a bit over budget. All is not lost. You just received an offer in the mail to transfer your $5,000 balance from your current credit card, which charges an annual rate of 18.7 percent, to a new credit card charging a rate of 9.4 percent. You plan to make payments of $510 a month on this debt. How many less payments will you have to make to pay off this debt if you transfer the balance to the new card?
  8. Present value may be defined as
  9. Which of the following statements is CORRECT?
  10. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?
  11. If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.
  12. What is the present value of the following cash flow stream at a rate of 6.25%? Y0=0

Y1=75 Y2=225 Y3=0 Y4=300

  1. Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

 

  1. You want to be a millionaire when you retire in 40 years. You can earn A 12.5 percent annual return. How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month?
  2. You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage loan for 80 percent of the $2,600,000 purchase price. The monthly payment on this loan will be $12,200. What is the effective annual rate on this loan?
  3. If $100 is placed in an account that earns a nominal 4 percent, compounded quarterly, what will it be worth in 5 years?
  4. You need a 30-year, fixed-rate mortgage to buy a new home for $240,000. Your mortgage bank will lend you the money at a 7.5 percent APR for this 360-month loan, with interest compounded monthly. However, you can only afford monthly payments of $850, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment. What will be the amount of the balloon payment if you are to keep your monthly payments at $850?
  5. What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?
  6. You have just taken out an installment loan for $100,000. Assume that the loan will be repaid in 12 equal monthly installments of

$9,456 and that the first payment will be due one month from today. How much of your third monthly payment will go toward the repayment of principal?

  1. The stated rate of interest is 10%. Which form of compounding will give the highest effective rate of interest?
  2. Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?
  3. Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)
  4. The interest rate that is quoted by a lender is referred to as which one of the following?
  5. Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?
  6. Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years. He could earn 4.5% on his money in other investments with equal risk. What is the most he should pay for the annuity?
  7. Jerry and Faith Hudson recently obtained a 30-year (360-month), $250,000 mortgage with a 9 percent nominal interest rate. What will be the remaining balance on the mortgage after five years (60 months)?
  8. You have just taken out an installment loan for $100,000. Assume that the loan will be repaid in 12 equal monthly installments of

$9,456 and that the first payment will be due one month from today. How much of your fourth monthly payment will go toward the repayment of principal?

  1. You are planning to save for retirement over the next 15 years. To do this, you will invest $1,100 a month in a stock account and

$500 a month in a bond account. The return on the stock account is expected to be 7 percent, and the bond account will pay 4 percent. When you retire, you will combine your money into an account with a 5 percent return. How much can you withdraw each month during retirement assuming a 20-year withdrawal period?

  1. A court settlement awarded an accident victim four payments of $50,000 to be paid at the end of each of the next four years. Using a discount rate of 4%, calculate the present value of the annuity.
  2. You have just taken out an installment loan for $100,000. Assume that the loan will be repaid in 12 equal monthly installments of

$9,456 and that the first payment will be due one month from today. How much of your fourth monthly payment will go toward the repayment of interest?

  1. You have just taken out a 24 -year, $ 253 ,000 mortgage loan at an annual interest rate of 8.4 percent. The mortgage has monthly payments. What is the amount of each payment?

 

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