FIN EXAM 2

Find the interest rates earned on each of the following: You borrow $720 and promise to pay back $792 at the end of 1 year. You lend $720 and the borrower promises to pay you $792 at the end of 1 year. You borrow $65,000 and promise to pay back $98,319 at the end of 14 years. You borrow $15,000 and promise to make payments of $4,058.60 at the end of each year for 5 years.

10% 10% 3% 11%

What is the present value of a security that will pay $29,000 in 20 years if securities of equal risk pay 5% annually?

10929.80

Sawyer Corporation's 2018 sales were $5 million. Its 2013 sales were $2.5 million. At what rate have sales been growing? Suppose someone made this statement: "Sales doubled in 5 years. This represents a growth of 100% in 5 years; so dividing 100% by 5, we find the growth rate to be 20% per year." Is the statement correct?

14.87% False

a. Find the present values of the following cash flow streams at a 5% discount rate. A (0,150,450,450,450,250) B (0,250,450,450,450,150) b. What are the PVs of the streams at a 0% discount rate?

1505.85 1522.73 1750 1750

If you deposit money today in an account that pays 4% annual interest, how long will it take to double your money?

17.67

If you deposit $2,000 in a bank account that pays 6% interest annually, how much will be in your account after 5 years?

2676.45

Find the present value of $500 due in the future under each of these conditions: 12% nominal rate, semiannual compounding, discounted back 5 years 12% nominal rate, quarterly compounding, discounted back 5 years 12% nominal rate, monthly compounding, discounted back 1 year

279.20 276.84 443.72

Your parents will retire in 19 years. They currently have $350,000 saved, and they think they will need $800,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they don't save any additional funds?

4.45%

Find the present values of these ordinary annuities. Discounting occurs once a year. $600 per year for 12 years at 8% $300 per year for 6 years at 4% $500 per year for 6 years at 0% Rework parts a, b, and c assuming they are annuities due.

4521.65 1572.64 3000 4883.38 1635.55 3000

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $50,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 4%. He currently has $90,000 saved, and he expects to earn 8% annually on his savings. How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal?

45488

You want to buy a house that costs $140,000. You have $14,000 for a down payment, but your credit is such that mortgage companies will not lend you the required $126,000. However, the realtor persuades the seller to take a $126,000 mortgage (called a seller take-back mortgage) at a rate of 5%, provided the loan is paid off in full in 3 years. You expect to inherit $140,000 in 3 years, but right now all you have is $14,000, and you can afford to make payments of no more than $22,000 per year given your salary. (The loan would call for monthly payments, but assume end-of-year annual payments to simplify things.) If the loan was amortized over 3 years, how large would each annual payment be? Could you afford those payments? If the loan was amortized over 30 years, what would each payment be? Could you afford those payments? To satisfy the seller, the 30-year mortgage loan would be written as a balloon note, which means that at the end of the third year, you would have to make the regular payment plus the remaining balance on the loan. What would the loan balance be at the end of Year 3, and what would the balloon payment be?

46268.28 no 8196.48 yes 128217.81

0,75,225,0,300 At the rate of 5.5% what is the present value?

515.41

Simon recently received a credit card with an 18% nominal interest rate. With the card, he purchased an Apple iPhone 7 for $372.71. The minimum payment on the card is only $10 per month. If Simon makes the minimum monthly payment and makes no other charges, how many months will it be before he pays off the card? Round to the nearest month. If Simon makes monthly payments of $35, how many months will it be before he pays off the debt? Round to the nearest month.

55 12

-500,75,225,0,300 If the cost (PV) were 500, what is the rate of return

6.65%

Find the following values using the equations and then a financial calculator. Compounding/discounting occurs annually. An initial $600 compounded for 1 year at 6% An initial $600 compounded for 2 years at 6% The present value of $600 due in 1 year at a discount rate of 6% The present value of $600 due in 2 years at a discount rate of 6%

636 674.16 566.04 534

Find the future values of these ordinary annuities. Compounding occurs once a year. $500 per year for 8 years at 14% $250 per year for 4 years at 7% $700 per year for 4 years at 0% Rework parts a, b, and c assuming they are annuities due.

6616.38 1109.99 2800 7542.67 1187.68 2800

Jan sold her house on December 31 and took a $10,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year. What is the dollar amount of each payment Jan receives?

802.43

You want to buy a car, and a local bank will lend you $40,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 8% with interest paid monthly. What will be the monthly loan payment? What will be the loan's EAR?

811.06 8.30%

An investment will pay $150 at the end of each of the next 3 years, $250 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 11% annually, what is its present value? Its future value?

976.60 1826.65