CH 5 & 6 HW

First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a $9,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 7 years?

CH 5 Q#1

Imprudential, Inc., has an unfunded pension liability of $475 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 6.1 percent, what is the present value of this liability?

CH 5 Q#10

In 1895, the first U.S. Open Golf Championship was held. The winner's prize money was $150. In 2014, the winner's check was $1,620,000. What was the percentage increase in the winner's check over this period? If the winner's prize increases at the same rate, what will it be in 2040?

CH 5 Q#13

Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003.... sold at auction for a price of $10,311,500. Unfortunately, for the previous for the previous owner, he had purchased it in 1999 at a price of $12,377,500. What was his annual rate of return on his sculpture?

CH 5 Q#14

Suppose you are still committed to owning a $225,000 Ferrari (see Question 9). If you believe your mutual fund can achieve an 12 percent annual rate of return and you want to buy the car in 9 years on the day you turn 30, how much must you invest today?

CH 5 Q#17

You have just made your first $5,000 contribution to your individual retirement account. Assuming you earn a 10 percent rate of return and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years before contributing? (Does this suggest an investment strategy?)

CH 5 Q#18

You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for six more years at 7.3 percent per year. How much will you have in eight years?

CH 5 Q#19

You expect to receive $15,000 at graduation in two years. You plan on investing it at 9 percent until you have $75,000. How long will you wait from now?

CH 5 Q#20

According to the Census Bureau, in January 2013, the average house price in the US was $306,900. In January 2000, the average price was $200,300. What was the annual increase in selling price.

CH 5 Q#8

The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $40,000 per year forever. If the required return on this investment is 5.1 percent, how much will you pay for the policy?

CH 6 Q#10

First National Bank charges 12.4 percent compounded monthly on its business loans. First United Bank charges 12.7 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?

CH 6 Q#14

Tai Credit Corp. wants to earn an effective annual return on its consumer loans of 16.5 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an uninformed borrower.

CH 6 Q#15

You want to buy a new sports coupe for $79,500, and the finance office at the dealership has quoted you a 5.8 percent APR loan for 60 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?

CH 6 Q#20

Beginning three months from now, you want to be able to withdraw $2,200 each quarter from your bank account to cover college expenses over the next four years. If the account pays 0.43 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years?

CH 6 Q#26

If the appropriate discount rate for the following cash flows is 9 percent compounded quarterly, what is the present value of the cash flows?

CH 6 Q#27

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 $2,700,000 purchase price. The monthly payment on this loan will be $13,400. What is the APR on this loan? The EAR?

CH 6 Q#45

If you put up $38,000 today in exchange for a 5.8 percent, 15-year annuity, what will the annual cash flow be?

CH 6 Q#5

You want to buy a new sports car from Muscle Motors for $68,000. The contract is in the form of a 60-month annuity due at an APR of 6.4 percent. What would your monthly payment be?

CH 6 Q#54

After deciding to buy a new car, you can either lease the car or purchase it on a three-year loan. The car you wish to buy costs $32,000. The dealer has a special leasing arrangement where you pay $1,200 today and $469 per month for the next three years. If you purchase the car, you will pay it off in monthly payments over the next three years at a 6 percent APR. You believe you will be able to sell the car for $19,000 in three years. Should you buy or lease the car? What break-even resale price in three years would make you indifferent between buying and leasing?

CH 6 Q#58 TEST

Your company will generate $57,000 in annual revenue each year for the next seven years from a new information database. If the appropriate interest rate is 7.8 percent, what is the present value of the savings?

CH 6 Q#6

You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent plus two points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. The interest rate quotation in this example requires the borrower to pay 2 points to the lender up front and repay the loan later with 8 percent interest. What rate would you actually be paying here?

CH 6 Q#62

You are buying a house and will borrow $200,000 on a 30-year fixed rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4 percent. Alternatively, she tells you that you can "buy down" the interest rate to 3.75 percent if you pay points upfront on the loan. A point on a loan is 1 percent (one percentage point) of the loan value. How many points, at most, would you be willing to pay to buy down the interest rate?

CH 6 Q#64

CH 6 Q#68

CH 6 Q#68

You have just arranged for a $1,950,000 mortgage to finance the purchase of a large tract of land. The mortgage has a 5.2 percent APR, and it calls for monthly payments over the next 30 years. However, the loan has an eight-year balloon payment, meaning that the loan must be paid off then. How big will the balloon payment be?

CH 6 Q#71

You want to have $50,000 in your savings account 12 years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.2 percent interest, what amount must you deposit each year?

CH 6 Q#8

Biktimirov Bank offers you a $50,000, five-year term loan at 7.5 percent annual interest. What will your annual loan payment be?

CH 6 Q#9