Finance

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.

effective annual

Suppose a business takes out a $7,000, five-year loan at 6 percent that will be paid annually with a single, fixed payment each period. How much will be the annual payment?

$1,661.88

A preferred stock pays an annual dividend of $5.20. What is one share of this stock worth today if the rate of return is 10.44 percent?

$49.81 PV = $5.20/.1044PV = $49.81

Assume a 1-year loan for $6,000 has an interest rate of 4.5 percent, compounded annually. How much additional interest would be charged if the rate had compounded continuously rather than annually?

$6.17

The variables in a future value of a lump sum problem include all of the following, except: Future Value Payments Time period Interest rate

Payments

How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)? Increase the time needed to save. Increase the present value. Decrease the present value. Increase the future value. Decrease the future value.

Decrease the future value.

How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)?

Decrease the present value.

How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)? Increase the time needed to save. Increase the present value. Change the future value. Decrease the present value.

Increase the present value.

Which loan type requires calls for the borrower to pay interest each period and to repay the entire principal at some point in the future?

Interest only

Which loan type requires the borrower to repay a single lump sum payment at some time in the future with interest?

Pure Discount

Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if these payments are paid at the beginning of each year rather than at the end of each year?

Yearly payments, P = $3,600 Annual discount rate, i = 8% = 0.08 Number of years, n = 12 Present value (PV) when payments are done at done the beginning of each year: PV = P+P[1-(1+i)^-(n-1)]/i = 3,600+3,600[1-(1+0.08)^-(12-1)]/0.08 = $29,300.27 Present value (PV) when payments are done at the end of each year: PV = P[1-(1+i)^-n]/i = 3,600[1-(1+0.08)^-12]/0.08 = $27,129.88 The difference between the two values = $29,300.27 - $27,129.88 = $2,170.39

With an interest-only loan the principal is:

repaid in one lump sum at the end of the loan period.

You want to be a millionaire when you retire in 30 years and expect to earn 8.5 percent, compounded monthly. 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?

time = 30 year = 30 × 12 = 360 months expected earn = 8.5 % = = 0.0070833 time = 10 year = 10 × 12 = 120 months future value = millionaire = solution we consider here saving end of this month = x and saving end of 10 year = y now we solve for x = x × = x × x = 605.8 and = y × = y × y = 1594.9 so here we require more amount to save is y - x in end of each month = 1594.9 - 605.8 = 981.9

You have been purchasing $12,000 worth of stock annually for the past eight years and now have a portfolio valued at $87,881. What is your annual rate of return?

− 2.54 percent