Fin 3715

Consider the following timeline: 0:? 1:$100 2:$200 3:$300 if the current market rate of interest is 8% then the present value (PV) of this timeline as of year 0 is closest to ______

100/(1.08)^1=92.59 200/(1.08)^2=171.47 300/(1.08)^3=238.15 Sum 502.21 which is approximately $502

A 12% APR with bi-monthly compounding is equivalent to an EAR of _____

12.62%

A $52000 loan is taken out on a boat with the term 3% APR for 36 months how much are they monthly payments on this loan

1512.22

T/F Market forces determine interest rates based ultimately on the willingness of individuals banks and firms to borrow save and lend

True

If 440 invested today yields $470 in a year's time what is the discount factor

Discount factor PV/FV=440/470=.936

Consider the following investment alternatives: - APR: 6.0860% Annual - 5.9320% daily - 5.997% Quarterly -5.9936% monthly -5.9936% Monthly The highest effective rate of return you could earn on any of these investments is closest to

6.1610%

What is the real interest rate given a nominal rate of 8.9% and an inflation rate of 1.9%

6.9%

Since your first birthday your grandparents have been depositing $1400 into a savings account on everyone of your birthdays. the account pays 5% interest annually. Immediately after your grandparents make the deposit on your 18th birthday the amount of money in your savings account will be closest to

39,385.34

Consider the following prices from a McDonald's Restaurant: Big Mac $3, Large Coke $1.5, Large fries $1 A mcdonald's big mac value meal consists of a BIg Mac sandwich large coke and large fries. Assuming that there is a competitive market for mcdonalds food items at what price must a big mac value meal sell to insure the absence of an arbitrage opportunity and uphold the law of one price?

$3 + 1.5 + 1= 5.5

If the rate of interest (r) is 10% then you should be indifferent about receiving $500 today or ______

$500 x 1.1 = $550 in one year or $550 x 1.1 =605 in two years

If $8000 is invested in a certain business at the start of the year the investor will receive $2400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year?

-8000 CF 2400 CF 2400 CF 2400 CF 2400 CF 6 I compute NPV you will get 316.25

you are borrowing money to buy a car if you can make payments of $420 per month starting one month from now at an interest rate of 12% how much will you be able to borrow for the car today if you finance the amount over 5 years?

N=60 (12 months *5 years) I =1 PMT=-420 FV=0 18,881.12

Consider the following timeline: 0:? 1:5000 2:6000 3:7000 4:8000 if the current market rate if interest is 10% then the present value of this stream of cash flows is closest to

compute NPV you will get 20,227.44

The effective annual rate for a loan with a stated APR of 11% compounded quarterly is closest to __________

11.46%

What is the future value (FV) of $60,000 in twenty years assuming the interest rate is 8% per year?

279,657.43

a homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900 after installation the solar water heater will produce a small amount of hot water every day forever and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (interest rate is 5% per year)

2900=C/.05 2900 x .05= C C=145

How long will it take $70000 placed in a saving account at 8% interest to grow into $100,000

4.63 years

Michelle has $22,000 in her savings account and can save an additional $5000 per year. If interest rates are 10% how long it take her savings to grow to $75000

5.79 years

If the current inflation rate is 3.6% and you have an investment opportunity that pays 10.9% then the real rate of interest on your investment is closest to ______

7%

a bank offers a loan that will require you to pay 7% interest compounded monthly which of the following is closest to the EAR charged by the bank

7.23%

Net Value

is the difference between purchase and resale price of the cadillac

an elderly relative offers to sell you their used 1958 cadillac eldorado for $60,000 you note that very similar cars are selling on the open market for $100,000 You dont care for classic cars and would rather buy a new ford explorer for $35000 what is the net value of buying the cadillac?

$100,000-$60,000- $40,000

If the one year discount factor is equal to .95 the interest must be equal to

By definition discount factor =1/(1+r) then r=1/discount factor-1=1/.95-1=5.26%

What is the present value (PV) of $100,000 received fiver years from now assuming the interest rate is 6% per year? FV=100,000 I =6 N=5 PV=?

youll get -74725.82 so the answer is 74725.82

Adam just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Adam has been offered an immediate payment of $200,000. He will also receive payments of $50,000 in one year, $70,000 in two years, and $75,000 in three years. The current market rate of interest for Adam is 6%.

372,441.01

A homeowner has five years of monthly payments of $1400 before she has paid off her house If the interest rate is 6% APR what is the remaining balance on her loan

72416

adam has the opportunity to invest in a scheme which will pay $7000 at the end of each of the next 5 years. He must invest $15,000 at the start of the first year and an additional $10,000 at the end of the first year what is the present value of this investment if the interest rate is 3%?

7349.21

2/2.25% 5/3.125% 10/3.5% 30/4.375% table above shows the interest rates available from investing in risk-free US treasury securities with different investment terms. if an investment offers a risk free cash flow of $100000 in two years what is the present value of that cash flow?

95647

Which of the following best describes the annual percentage? A) the quoted interest rate which considered with the compounding period gives the effective interest rate B) the discount rate when effective annual rate is divided by the number of times it is compounded in a year C) the effective annual rate after compounding is taking into account D) the discount rate when compounded more than once a year or less than once a year

A) the quoted interest rate which considered with the compounding period gives the effective interest rate

Which of the following statements is false? A) the interest rates that are quoted by banks and other financial institutions are nominal interest rates B) Fundamentally interest rates are determined by the federal reserve C) the federal reserve determines very short term interest rates through its influence on the federal funds rate D) the interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan

B) Fundamentally interest rates are determined by the federal reserve

Consider the following prices from a McDonald's Restaurant: Big Mac $3, Large Coke $1.5, Large fries $1 A mcdonald's big mac value meal consists of a BIg Mac sandwich large coke and large fries. Assuming that there is a competitive market for mcdonalds food items and that mcdonalds sells the big mac value meal for 4.75 does an arbitrage opportunity exist and if so how would you exploit it and how much would you make on one value meal?

Buy a value meal and sell the big mac coke and fries -4.75+3+1.5+1=.75 this is your arbitrage profit

Consider the following timeline: 0: -$150 1: $40 2: $80 3: $100 if the current market rate of interest is 13% then the value of the cash flows in year 0 and year 2 as of year is closest to _______

FV of year 0 c/f=FV=PV(1+r)^n=-150(1.13)^1=-$169.50 PV of year 2 c/f=PV=FV /(1+r)^n=80/(1.13)^1 =70.80 -169.50+70.80=-$98.70

T/F Joe borrows $100,000 and agrees to repay the principal plus 7% APR interest compounded monthly at the end of 3 years joe has taken out an amortizing loan

False

T/F The real interest rate is the rate of growth of one's purchasing power due to money invested

False

T/F the annual percentage rate indicates the amount of interest including the effect of any compounding

False

T/F when there are large numbers of people looking to save their money and there is little demand for loans one would expect interest rates to be high

False

A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lender's perspective?

From the lender's perspective, since he is lending now (t=0) we have a cash outflow of 10,100 (or -10,100) at year 0 and 2070 payments for years 1 through 6

Which of the following accounts has the highest EAR? A) one that pays 9.6% per year B) one that palys 5.4% every six months C) one that pays 2.4% every three months D) One that pays 1.0% per month

One that pays 1.0% per month

you are considering investing in a zero-coupon bond that will pay you its face value of $1000 in ten years. If the bond is currently selling for $596.45 then the internal rate of return for investing in this bond is closest to

PV = -596.45 FV = 1000 N = 10 Compute I you will get 5.3 this means IRR = 5.3%

what is the present value of an investment that will pay $600 in one years time and $600 every year after that when the interest rate is 10%

PV=600/.1=6000

a rich donor gives a hospital 1,040,000 one year from today. Each year after that the hospital will receive a payment 6% larger than the previous payment with the last payment occuring in 10 years. what is the present value of this donation given that the interest rate is 11%

PV=C x 1/(r-g)(1-((1+g)/(1+r))^N) =1,040,000 x 1/(.11-.06)(1-((1+.06)/(1+.11))^10) =1,040,000 x 1/(.05)(1-((1.06)/(1.11))^10) 7681257.74

5 years ago you took out a 30 year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25% how much would your monthly payment change by

To compute original payments N=360 I =6.5/12 PV=200,000 PMT--> 1264.14 N:300 I 6.5/12 PMT -1264.14 Compute PV 187221.96 After refinance: N=240 I = 4.25/12 PV=187,221.96 Compute PMT-> 1159.35 1264.14-1159.35=104.79

Heavy duty company a manufacturer of power tools decides to offer a rebate of $150 on its 16-inch mid- range chain saw, which currently has a retail price $490. Heavy Duty's marketers estimate that, as a result of the rebate, sales of this model will increase from 50,000 to 70,000 units next year. The profit margin for Heavy Duty before the rebate is $200. Based on the given information, is the decision to give the rebate a wise one?

Without rebate: 50,000x 200=10,000,000 After the rebate: Profit margin drops to 200-150=50 70,000 x $50 = 3,500,000 so they'll be making 6,500,000 less in profit in other words no it is not a wise one since costs are $6.5M more than the benefits

A wholesale food retailer is offered $15.60 per two layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $3 per carton for the first 1000 cartons and $2 per carton for every carton over that will taking this opportunity increase the value of the wholesale food retailer?

Yes because cost are $1000 less than the benefit Benefit: 15.6 x 5000 = 78,000 Costs: (13.2 x 5000) +(3 x 1000) + ($2 x 4000) =66,000 + 3,000+ 8,000= 77,000

Dan buys property for $300,000 he is offered a 20 year loan by the bank at an interest rate of 8% per year. the bank requires him to make a down payment of 10%. what is the annual loan payment he must make?

loan amount 300,000-30,000=270,000 N=20 I=8 PV=-270,000 PMT=? PMT = 27500.096

Consider the following timeline: 0:500 1:? 2:-500 if the current market rate of interest is 7% then the value as of year 1 is closest to ________

question can be rephrased as follows: what should the value in year 1 be so that pv equals to 500? Lets call the value in year 1 "A" then 500=A/1.07+(-500)/(1.07)^2 500=A/1.07-436.72 936.72=A/1.07 A=936.72x1.07=1002.29