Finance hw ch 4-7

Joshua borrowed $500 on January 1, 2017, and paid $25 in interest. The bank charged him a service charge of $17. He paid it all back at once on December 31, 2017. What was the APR?

Finance charge=Interest + Service charge = $25 + $17 = $42 APR =Finance charge / Principal = $42 / $500 = 0.084, or 8.4%

the decision to rent or buy a home is an important decision that can affect not only your ________________, but also your _________________.

Financial decisions; quality of life

In an attempt to have funds for a down payment in three years, James Dupont plans to save $3,750 a year for the next three years. With an interest rate of 4 percent, what amount will James have available for a down payment after the three years?

Future value down payment= Annual savings × Future value annuity factor = $3,750 × 3.122 = $11,707.50

You estimate that you can save $3,400 by selling your home yourself rather than using a real estate agent. What would be the future value of that amount if invested for eight years at 2 percent?

Future value=Annual savings × Future value factor = $3,400 × 1.172 = $3,984.80

Calculate the costs of buying versus leasing a motor vehicle based on the information provided. BUYING -Down payment: $1,500 -Loan payment: $450 for 48 months -Estimated value at end of loan: $4,000 -Opportunity cost interest rate: 4 percent per year LEASING -Security deposit: $500 -Lease payment: $450 for 48 months -End-of-lease charges: $600

Buying: Purchase cost =Down payment + [Down payment × Interest rate × (Number of months / 12)] + (Loan payment × Number of payments) - Ending vehicle value =$1,500 + [$1,500 × 0.04 × (48 / 12)] + ($450 × 48) − $4,000 = $19,340 Leasing: Lease cost=[Security deposit × Interest rate × (Number of months / 12)] + (Lease payment × Number of payments) + End-of-lease charges =[$500 × 0.04 × (48 / 12)] + ($450 × 48) + $600 = $22,280

Janie has a joint account with her mother with a balance of $567,000. Based on $250,000 of Federal Deposit Insurance Corporation coverage, what amount of Janie's savings would not be covered by deposit insurance?

Janie's portion of joint account= 0.50 × $567,000=$283,500 Uninsured portion of Janie's account=Janie's portion of joint account - FDIC coverage amount = $283,500 - $250,000 = $33,500

Lia wants to buy a new car. She needs a loan for $ 12,000. The local credit union offers her a 60 month loan at a promotional rate of 2.4%. Her monthly payment is $_____

Known PV = loan amount, N = number of months, and i = monthly rate (annual rate / 12), find the payment (PMT) or annuity (A) = $212.44

Mason is applying for a 30-year mortgage with a 5% interest rate. Mason has an annual income of $50,000 and has no additional debt. His estimated monthly property taxes and homeowners insurance is equal to $430. What is Mason's affordable mortgage amount?

MGI = $50,000/12 = $4,166.67 33% max of MGI without other debt = $4,166.67 x 0.33 = $1,375 Affordable monthly mortgage payment = $1,375 - $430 = $945 Affordable mortgage amount = [($945/5.37) x 1,000] = $175,977.65

Paisley has an annual income of $54,600 and has additional debt of $350. Her estimated monthly property taxes and homeowners insurance is equal to $390. What is Paisley's affordable monthly mortgage payment?

MGI = $54,600/12 = $4,550 38% max of MGI with other debt = $4,550 x 0.38 = $1,729 Affordable monthly mortgage payment = $1,729 - $350 - $390 = $989.00

What would be the monthly mortgage payments for each of the following situations? a.) A $163,500, 20-year loan at 5 percent. b.) A $218,500, 25-year loan at 5.5 percent c.) A $197,000, 30-year loan at 5 percent.

Monthly mortgage payment= Mortgage payment factor × (Mortgage amount / $1,000) a.) = $6.60 × ($163,500 / $1,000) = $1,079.10 b.) = $6.14 × ($218,500 / $1,000) = $1,341.59 c.) = $5.37 × ($197,000 / $1,000) = $1,057.89

Ben and Carla Covington plan to buy a condominium. They will obtain a $226,000, 30-year mortgage at 8.0 percent. Their annual property taxes are expected to be $2,100. Property insurance is $540 a year, and the condo association fee is $250 a month. Based on these items, determine the total monthly housing payment for the Covingtons

Monthly mortgage payment=Mortgage payment factor × (Mortgage amount / $1,000) = $7.34 × ($226,000 / $1,000) = $1,658.84 Total monthly housing payment=Monthly mortgage payment + [(Property taxes + Insurance) / 12] + Condo association fee = $1,658.84 + [($2,100 + $540) / 12] + $250 = $2,128.84

What would be the net present value of a microwave oven that costs $159 and will save you $68 a year in time and food away from home? Assume an average return on your savings of 4 percent for five years. (Hint: Calculate the present value of the annual savings, then subtract the cost of the microwave.)

Net present value=(Annual savings × Present value annuity factor) - Initial cost = ($68 × 4.452) - $159 = $143.74

What is the annual opportunity cost of a checking account that requires a minimum balance of $210 to avoid service charges? Assume an interest rate of 4 percent.

Opportunity cost=Required minimum balance ×Interest rate = $210 × 0.04 = $8.40

If an adjustable-rate 30-year mortgage for $122,000 starts at 6.5 percent and increases to 7.0 percent, what is the increase in the monthly payment amount?

Payment increase=(New mortgage factor − Old mortgage factor) × (Mortgage amount / $1,000) = ($6.65 − $6.32) × ($122,000.00 / $1,000) = $40.26

A work-at-home opportunity is available in which you will receive 3 percent of the sales for customers you refer to the company. The cost of your "franchise fee" is $600. How much would your customers have to buy to cover the cost of this fee?

Purchase requirement=Franchise fee / Earnings rate = $600 / 0.03 = $20,000

An online buying club offers a membership for $300, for which you will receive a discount of 10 percent on all brand-name items you purchase. How much would you have to buy to cover the cost of the membership?

Purchase requirement=Membership fee / Discount rate = $300 / 0.10 = $3,000

Heather is currently in a 15% tax bracket and has a 3.4% savings rate of return. What is her after-tax savings rate of return?

Step 1: Determine your top (marginal) tax rate = 15% Step 2: Subtract your tax rate from 1.0 = 1.0 - 0.15 = 0.85 Step 3: Multiply the yield on your savings account with step 2 answer. = 0.034 x 0.85 = 2.89%

Will is currently in a 22% tax bracket and has a 7.2% savings rate of return. What is his after-tax savings rate of return?

Step 1: Determine your top (marginal) tax rate = 22% Step 2: Subtract your tax rate from 1.0 = 1.0 - 0.22 = 0.78 Step 3: Multiply the yield on your savings account with step 2 answer. = 0.072 x 0.78 = 5.62%

Lia wants to buy a new car. She needs a loan for $ 12,000. The local credit union offers her a 60 month loan at a promotional rate of 2.4%. Her total interest payments are $_____

Total Interest = Monthly Payments x Months - Loan amount = $746

Louise McIntyre's monthly gross income is $3,100. Her employer withholds $780 in federal, state, and local income taxes and $330 in Social Security taxes per month. Louise contributes $180 each month for her IRA. Her monthly credit payments for VISA and MasterCard are $105 and $100, respectively. Her monthly payment on an automobile loan is $335. a.) What is Louise's debt payments-to-income ratio? b.) Is Louise living within her means?

a.) -Net income= Gross income - Income taxes - Social Security taxes - IRA contribution = $3,100 − $780 − $330 − $180 = $1,810 -Monthly debt payments =VISA + MasterCard + Car loan = $105 + $100 + $335 = $540 -Debt payments-to-income ratio=Total debt payments / After-tax income = $540 / $1,810 = 0.2983, or 29.83% b.) A debt payments-to-income ratio less than 20 percent indicates living within one's means, while a ratio in excess of 20 percent indicates an individual is living beyond their means. So, Louise is living beyond her means.

a.) What is the total cash outflow for buying and for leasing a motor vehicle with a cash price of $24,000? b.) Based on your answers in part a, would you recommend buying or leasing? Use the following date to answer... -Down payment (to FINANCE vehicle))$4,000 -Monthly loan payment)$560 -Length of the loan) 48months -Value of vehicle at end of loan) $7,200 -Down payment for LEASE) $1,200 -Monthly lease payment) $440 -Length of the lease)48months -End-of-lease charges) $600

a.) Buying: Total cash outflow= Down payment + (Loan payment × Number of payments) - Ending vehicle value = $4,000 + ($560 × 48) - $7,200 = $23,680 Leasing: Total cash outflow= Down payment + (Lease payment × Number of payments) + End-of-lease charges = $1,200 + ($440 × 48) + $600 = $22,920 b.) You should choose the option with the lower total cash outflow, which in this case is leasing.

a.) Calculate total annual operating cost of the motor vehicle. b.)Calculate the operating cost per mile. Use the data provided here, calculate the items requested: -Annual depreciation)$2,500 -Current year's loan interest)$650 -Insurance)$680 -License and registration fees)$65 -Average gasoline price)$3.50 per gallon - Parking/tolls) $420 -Annual mileage) 13,200 -Miles per gallon) 24 -Oil changes/repairs)$370

a.) Total variable costs =[(Annual mileage / Miles per gallon) × Gas price per gallon] + Oil changes and repairs + Parking and tolls = [(13,200 / 24) × $3.50] + $370 + $420= $2,715 Total fixed cost=Depreciation + Loan interest + Insurance + License and registration fees = $2,500 + $650 + $680 + $65 = $3,895 Total annual operating costs= Total variable costs + Total fixed costs = $2,715 + $3,895 = $6,610 b.) Operating cost per mile=Total annual operating costs / Annual mileage = $6,610 / 13,200 = $0.50, or 50 cents per mile

Assume a person saves $62 a month by using coupons and doing comparison shopping. a.) What is the amount of annual savings? b.) What would be the future value of this annual amount over 10 years, assuming an interest rate of 4 percent?

a.) Annual savings=Monthly savings × 12 = $62 × 12 = $744 b.) Future value=Annual savings × Future value annuity factor = $744 × 12.006 = $8,932.46

Sidney took a cash advance of $300 by using checks linked to her credit card account. The bank charges a cash advance fee of 2 percent on the amount borrowed and offers no grace period on cash advances. Sidney paid the balance in full when the bill arrived. a.) What was the cash advance fee? b.)What was the interest for one month at an APR of 12 percent? c.) What was the total amount she paid? d.) What if she had made the purchase with her credit card and paid off her bill in full promptly? Assume the credit card has a 30-day grace period.

a.) Cash advance fee=Cash advance fee percent × Cash advance amount = 0.02 × $300 = $6.00 b.) Monthly interest =(Annual rate / 12) × Cash advance amount = (0.12 / 12) × $300 = $3.00 c.) Total amount paid=Cash advance fee + Monthly interest + Cash advance amount = $6.00 + $3.00 + $300 = $309.00 d.) Total amount paid=Cash advance amount = $300.00 If her credit card did not have a grace period, then she would also have owed the monthly interest.

Robert Sampson owns a townhouse valued at $181,000 and still has an unpaid mortgage of $146,000. In addition to his mortgage, he has the following liabilities: Visa)$735 MasterCard) $340 Discover card) $535 Education loan) $5,000 Personal bank loan) $900 Auto loan) $5,600 Total$) $13,110 Robert's net worth (not including his home) is about $35,000. This equity is in mutual funds, an automobile, a coin collection, furniture, and other personal property. a.)What is Robert's debt-to-equity ratio? b.) Has he reached the upper limit of debt obligations?

a.) Debt-to-equity ratio=Total debt excluding mortgage / Net worth excluding home = $13,110 / $35,000 = 0.37 b.) The upper limit of the debt-to-equity ratio is 1, so he has not reached his upper limit.

After visiting several automobile dealerships, Richard selects the car he wants. He likes its $16,500 price, but financing through the dealer is no bargain. He has $3,300 cash for a down payment, so he needs a loan of $13,200. In shopping at several banks for an installment loan, he learns that interest on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on the full amount borrowed even though a portion of the principal has been paid back. Richard borrows $13,200 for a period of four years at an add-on interest rate of 10 percent. a.) What is the total interest on Richard's loan? b.)What is the total cost of the car? c.)What is the monthly payment? d.)What is the annual percentage rate (APR)?

a.) I=P × r × T = $13,200 × 0.10 × 4 = $5,280 b.) Total cost=Down payment + Interest + Principal = $3,300 + $5,280 + $13,200 = $21,780 c.) Monthly payment=(Interest + Principal) /Number of months = ($5,280 + $13,200) / (4 × 12) = $385 d.)APR=(2 × n × I) / [P(N + 1)] = (2 × 12 × $5,280) / [$13,200(48 + 1)] = 0.1959, or 19.59%

Madeline Rollins is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now, Madeline is living at home and works in a shoe store, earning a gross income of $1,280 per month. Her employer deducts a total of $330 for taxes from her monthly pay. Madeline also pays $195 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $300 per month. a.) Calculate her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) b.) Can she currently afford the school loan?

a.) With college loan: Debt payments-to-income ratio=Total debt payments / Net take-home pay = ($195 + $300) / ($1,280 − $330) = 0.5211, or 52.11% Without college loan: Debt payments-to-income ratio=Total debt payments / Net take-home pay = $195 / ($1,280 − $330) = 0.2053, or 20.53% b.) According to the 20 percent rule, she cannot afford the college loan at this time.

What would be the net annual cost of the following checking accounts? a.) Monthly fee, $2.50; processing fee, 45 cents per check; checks written, an average of 25 a month. b.) Interest earnings of 3 percent with a $450 minimum balance; average monthly balance, $550; monthly service charge of $19 for falling below the minimum balance, which occurs four times a year (no interest earned in these months).

a.)Net annual cost=12 × [(Average number of checks per month × Cost per check) + Monthly fee] = 12 × [(25 × $0.45) + $2.50] = $165.00 b.)Net annual cost=Service charges - Interest earnings = (4 × $19) - (8 / 12)(0.03 × $550) = $65.00

All of the following is a disadvantage of buying a home, EXCEPT: a) It can be difficult to find a buyer that can qualify for a loan to buy your home. b)The cost of buying a home is greater than the cost of renting a home. c)It can be hard to maintain ownership of the home. Correct d)It can be difficult to find a buyer that will pay what your home is worth. e)It can be hard to move if you buy a home because you must sell the home to someone else.

c) It can be hard to maintain ownership of the home. -Disadvantages of buying a home include the higher cost to buy a home, difficulty in moving or changing homes, and difficulty in finding a buyer that will pay what your home is worth and can qualify for a loan to buy your home may take time.

Chapter 4 Homework

cards 2-11

Chapter 6 HW

cards 24-34

Chapter 7 HW

cards 36-

Marsha invests $1,350 and earns a $105 return at the end of one year. What is her annual percentage yield (APY)?

APY = 100(Interest/Principal) = 100(105/1,350) = 7.78%

Aubrie is going to make a 22% down payment on her house. If her affordable mortgage amount is $212,476.35, what is Aubrie's affordable home purchase price?

Affordable home purchase price = $212,476.35/(1 - 0.22) = $272,405.58

Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation. -Monthly gross income) $3,400 -Other debt (monthly payment)$205, 15-year loan at 6 percent -Down payment to be made (percent of purchase price)15 percent -Monthly estimate for property taxes and insurance) $255

Affordable monthly mortgage payment= (Monthly gross income × 0.38) − Monthly estimate for property taxes and insurance − Other debt = ($3,400 × 0.38) - $255 - $205 = $832 Affordable mortgage amount=Affordable monthly mortgage payment / Mortgage payment factor × $1,000 = $832 / $8.44 × $1,000 = $98,578.20, or $98,578 Affordable home purchase=Affordable mortgage amount / (1 − Down payment percent) = $98,578.20 / (1 - 0.15) = $115,974

With a 30 percent marginal tax rate, would a tax-free yield of 6 percent or a taxable yield of 8.6 percent give you a better return on your savings?

Aftertax yield =Taxable yield × (1 - Tax rate) = 0.086 × (1 - 0.30) = 0.0602, or 6.02% The better return is the option that has the higher aftertax yield. So, Taxable yield of 8.6 percent.

With a 28 percent marginal tax rate, would a tax-free yield of 6.2 percent or a taxable yield of 10.5 percent give you a better return on your savings?

Aftertax yield =Taxable yield × (1 - Tax rate) = 0.105 × (1 - 0.28) = 0.0756, or 7.56% The better return is the option that has the higher aftertax yield. So, Taxable yield of 10.5 percent.

A few years ago, Simon Powell purchased a home for $205,000. Today, the home is worth $360,000. His remaining mortgage balance is $155,000. Assuming that Simon can borrow up to 65 percent of the market value, what is the maximum amount he can currently borrow against his home?

Amount available for borrowing=(Maximum loan percent × Current market value) − Current loan = (0.65 × $360,000) − $155,000 = $79,000

A payday loan company charges 4.2 percent interest for a four-week period. What would be the annual interest rate from that company?

Annual interest rate= Interest rate per period ×Number of periods per year = 0.042 × (52 / 4) = 0.546, or 54.6%

What would be the annual percentage yield for a savings account that earned $78 in interest on $1,000 over the past 365 days?

Annual percentage yield= Annual interest / Principal = $78 / $1,000 = 0.078, or 7.8%

John Walters is comparing the cost of credit to the cash price of an item. If John makes a down payment of $80 and pays $35 a month for 24 months, how much more will that amount be than the cash price of $685?

Cost of credit =Down payment + (Payment amount × Number of payments) - Cash price = $80 + ($35 × 24) - $685 = $235

A service contract for a video projection system costs $70 a year. You expect to use the system for five years. Instead of buying the service contract, what would be the future value of these annual amounts after five years if you earn 3 percent on your savings?

FV=Annual cost × Future value annuity factor = $70 × 5.309 = $371.63

Joshua borrowed $2,200 for one year and paid $132 in interest. The bank charged him a service charge of $21. What is the finance charge on this loan?

Finance charge=Interest + Service charge = $132 + $21 = $153

Joshua borrowed $2,200 for one year and paid $132 in interest. The bank charged him a service charge of $21. If Joshua repaid the loan in 12 equal monthly payments, what is the APR?

Finance charge=Interest + Service charge = $132 + $21 = $153 APR =(2 × n × I) / [P(N + 1)] = (2 × 12 × $153) / [$2,200(12 + 1)] = 0.128, or 12.8%

Advantages of renting a home

Individuals can rent a home with a smaller financial commitment than if you were to buy a home, It is easy to move or change homes if you don't like the first home, and There is less maintenance associated with renting a home. -Advantages of renting a home includes a smaller financial commitment, it easier to move or change homes, and there is less maintenance associated with renting a home.

What are the interest cost and the total amount due on a six-month loan of $1,100 at 14 percent simple annual interest?

Interest cost (I)=P × r × T = $1,100 × 0.140 × (6 / 12) = $77 Total amount due=Interest + Principal = $77 + $1,100 = $1,177

Kelly and Tim Jarowski plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage payments by $59 a month. Their closing costs for refinancing will be $1,750. How long will it take them to cover the cost of refinancing?

Number of months=Closing costs / Monthly payment reduction = $1,750 / $59 = 29.66, or 30

Chapter 5 Homework

cards 13-22