Exam 5-8
Kurt Simmons has 70/170/20 auto insurance coverage. One evening, he lost control of his vehicle, hitting a parked car and damaging a storefront along the street. Damage to the parked car was $7,900, and damage to the store was $23,820.
a. Insurance payment = MIN[Claim amount, Policy limit]= MIN[($7,900 + $23,820), $20,000]= $20,000 b. Personal liability = Claim amount − Insurance payment= ($7,900 + $23,820) − $20,000= $11,720
Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation. Monthly gross income $ 3,485 Other debt (monthly payment) $ 245 25-year loan at 7 percent Down payment to be made (percent of purchase price) 20 percent Monthly estimate for property taxes and insurance$ 190
Affordable monthly mortgage payment = (Monthly gross income × 0.38) − Monthly estimate for property taxes and insurance − Other debt= ($3,485 × 0.38) − $190 − $245= $889.30, or $889 Affordable mortgage amount = Affordable monthly mortgage payment/Mortgage payment factor × $1,000= $889/$7.07 × $1,000= $125,742.57, or $125,743 Affordable home purchase = Affordable mortgage amount/(1 − Down payment percent)= $125,743/(1 − 0.20)= $157,178.75, or $157,179
A few years ago, Simon Powell purchased a home for $185,000. Today, the home is worth $320,000. His remaining mortgage balance is $135,000. Assuming that Simon can borrow up to 80 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 (0.80 × $320,000) − $135,000= $121,000
Many locations require that renters be paid interest on their security deposits. If you have a security deposit of $2,500, how much interest would you expect to earn per year at 3 percent?
Annual interest = Interest rate × Security deposit= 0.03 × $2,500= $75
Karen and Mike currently insure their cars with separate companies, paying $550 and $750 a year. If they insured both cars with the same company, they would save 10 percent on the annual premiums. What would be the future value of the annual savings over 10 years based on an annual interest rate of 4 percent? Use Exhibit 1-B. (Round FVA factor to 3 decimal places and final answer to 2 decimal places.)
Annual savings = Annual premium × Savings percent= ($550 + $750) × 0.10= $130 Future value = Annual savings × Future value annuity factor= $130 × 12.006= $1,560.78
Shaan and Anita currently insure their cars with separate companies, paying $830 and $665 a year. If they insure both cars with the same company, they would save 10 percent on their annual premiums. What would be the future value of the annual savings over 10 years based on an annual interest rate of 7 percent? Use Exhibit 1-B. (Do not round intermediate calculations. Round FVA factor to 3 decimal places and final answer to 2 decimal places.)
Annual savings = Annual premium × Savings percent= ($830 + $665) × 0.10= $149.50 Future value = Annual savings × Future value annuity factor= $149.50 × 13.816= $2,065.49
Use the following data: Purchase Costs Down payment: $7,500 Loan payment: $250 for 48 months Estimated value at end of loan: $6,000 Opportunity cost interest rate: 4 percent per year Leasing Costs Security deposit: $2,500 Lease payment: $250 for 48 months End-of-lease charges: $900
Buying: Purchase cost = Down payment + [Down payment × Interest rate × (Number of months/12)] + (Loan payment × Number of payments) - Ending vehicle value= $7,500 + [$7,500 × 0.04 × (48/12)] + ($250 × 48) − $6,000= $14,700 Leasing: Lease cost = [Security deposit × Interest rate × (Number of months/12)] + (Lease payment × Number of payments) + End-of-lease charges= [$2,500 × 0.04 × (48/12)] + ($250 × 48) + $900= $13,300
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 $1,160 per month. Her employer deducts a total of $270 for taxes from her monthly pay. Madeline also pays $165 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $240 per month.
Calculate her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) (Enter your answers as a percent rounded to 2 decimal places.) With college loan: Debt payments-to-income ratio = Total debt payments/Net take-home pay= ($165 + $240)/($1,160 − $270)= 0.4551, or 45.51% Without college loan: Debt payments-to-income ratio = Total debt payments/Net take-home pay= $165/($1,160 − $270)= 0.1854, or 18.54% Can she currently afford the school loan? NO According to the 20 percent rule, she cannot afford the college loan at this time.
John Walters is comparing the cost of credit to the cash price of an item. If John makes a down payment of $130 and pays $35 a month for 24 months, how much more will that amount be than the cash price of $713?
Cost of credit = Down payment + (Payment amount × Number of payments) − Cash price= $130 + ($35 × 24) − $713= $257
A service contract for a video projection system costs $230 a year. You expect to use the system for four years. Instead of buying the service contract, what would be the future value of these annual amounts after four years if you earn 4 percent on your savings? Use Exhibit 1-B.
FV = Annual cost × Future value annuity factor= $230 × 4.246= $976.58
Joshua borrowed $2,100 for one year and paid $105 in interest. The bank charged him a service charge of $18. What is the finance charge on this loan?
Finance charge = Interest + Service charge= $105 + $18= $123
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? (Enter your answer as a percent rounded to 1 decimal place.)
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%
Joshua borrowed $500 on January 1, 2021, and paid $30 in interest. The bank charged him a service charge of $22. He paid it all back at once on December 31, 2021. What was the APR? (Enter your answer as a percent rounded to 1 decimal place.)
Finance charge = Interest + Service charge= $30 + $22= $52 APR = Finance charge/Principal= $52/$500= 0.104, or 10.4%
You estimate that you can save $4,400 by selling your home yourself rather than using a real estate agent. What would be the future value of that amount if invested for seven years at 3 percent? Use Exhibit 1-A. (Round FV factor to 3 decimal places and final answer to 2 decimal places.)
Future value = Annual savings × Future value factor= $4,400 × 1.230= $5,412.00
In an attempt to have funds for a down payment in five years, James Dupont plans to save $4,550 a year for the next five years. With an interest rate of 4 percent, what amount will James have available for a down payment after the five years? Use Exhibit 1-B. (Round FVA factor to 3 decimal places and final answer to 2 decimal places.)
Future value down payment = Annual savings × Future value annuity factor= $4,550 × 5.416= $24,642.80
For each of the following situations, what amount would the insurance company pay?
Insurance payment = MAX[(Claim amount − Deductible),0] a.Wind damage of $2,300; the insured has a deductible of $600. Insurance payment = MAX[($2,300 − $600,0]= $1,700 b.Theft of a stereo system worth $2,700; the insured has a deductible of $600. Insurance payment = MAX[($2,700 − $600,0]= $2,100 c.Vandalism that does $595 of damage to a home; the insured has a deductible of $600. Insurance payment = MAX[($595 − $600,0]= $0
What amount would a person with actual cash value coverage receive for four-year-old furniture destroyed by a fire? The furniture would cost $4,000 to replace today and had an estimated life of eight years.
Insurance payment = Replacement cost − Depreciation= $4,000 − (4/8 × $4,000)= $2,000
What are the interest cost and the total amount due on a six-month loan of $1,700 at 14 percent simple annual interest?
Interest cost (I) = P × r × T= $1,700 × 0.140 × (6/12)= $119 Total amount due = Interest + Principal= $119 + $1,700= $1,819
Ben and Carla Covington plan to buy a condominium. They will obtain a $228,000, 25-year mortgage at 5.0 percent. Their annual property taxes are expected to be $2,200. Property insurance is $560 a year, and the condo association fee is $260 a month. Based on these items, determine the total monthly housing payment for the Covingtons. Use Exhibit 7-7. (Round your intermediate calculations and final answer to 2 decimal places.)
Monthly mortgage payment = Mortgage payment factor × (Mortgage amount/$1,000)= $5.85 × ($228,000/$1,000)= $1,333.80 Total monthly housing payment = Monthly mortgage payment + [(Property taxes + Insurance)/12] + Condo association fee= $1,333.80 + [($2,200 + $560)/12] + $260= $1,823.80
Which mortgage would result in higher total payments? Mortgage A: $1,030 a month for 10 years Mortgage B: $870 a month for 4 years and $1,110 a month for 6 years.
Mortgage A: Total payments = Monthly payment × 12 × Number of years= $1,030 × 12 × 10= $123,600 Mortgage B: Total payments = (Monthly payment1 × 12 × Number of years1) + (Monthly payment2 × 12 × Number of years2)= ($870 × 12 × 4) + ($1,110 × 12 × 6)= $121,680
What would be the net present value of a microwave oven that costs $174 and will save you $83 a year in time and food away from home? Assume an average return on your savings of 4 percent for 5 years. (Hint: Calculate the present value of the annual savings, then subtract the cost of the microwave.) Use Exhibit 1-D. (Round PVA factor to 3 decimal places and final answer to 2 decimal places.)
Net present value = (Annual savings × Present value annuity factor) − Initial cost= ($83 × 4.452) − $174= $195.52
Kelly and Tim Jarowski plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage payments by $57 a month. Their closing costs for refinancing will be $1,765. How long will it take them to cover the cost of refinancing? (Round your answer to the nearest whole number.)
Number of months = Closing costs/Monthly payment reduction= $1,765/$57= 30.96, or 31
If an adjustable-rate 20-year mortgage for $130,000 starts at 6.5 percent and increases to 7.0 percent, what is the increase in the monthly payment amount? Use Exhibit 7-7. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Payment increase = (New mortgage factor − Old mortgage factor) × (Mortgage amount/$1,000)= ($7.75 − $7.46) × ($130,000/$1,000)= $37.70
A work-at-home opportunity is available in which you will receive 3 percent of the sales to customers you refer to the company. The cost of your "franchise fee" is $680. How much would your customers have to buy to cover the cost of this fee? (Round your answer to the nearest whole dollar.)
Purchase requirement = Franchise fee/Earnings rate= $680/0.03= $22,667
An online buying club offers a membership for $115, 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= $115/0.10= $1,150
What would it cost an insurance company to replace a family's personal property that originally cost $20,000? The replacement costs for the items have increased 15 percent.
Replacement cost = Original cost × (1 + Inflation percent)= $20,000 × (1 + 0.15)= $23,000
If Carissa Dalton has a $310,000 home insured for $240,000, based on the 80 percent coinsurance provision, how much would the insurance company pay on a claim of $12,500? Assume there is no deductible. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Required coverage = 0.80 × Value of home= 0.80 × $310,000= $248,000 Claim payment = (Coverage amount/Required coverage) × Claim amount= ($240,000/$248,000) × $12,500= $12,096.77
Becky Fenton has 20/40/15 automobile insurance coverage. If two other people are awarded $35,000 each for injuries in an auto accident in which Becky was judged at fault, how much of this judgment would the insurance cover?
The maximum amount covered is $20,000 per person with a combined maximum of $40,000 for all persons. Insurance payment = $40,000
Condominiums usually require a monthly fee for various services. At $245 a month, how much would a homeowner pay over a period of 8 years for living in this housing facility?
Total fee = Monthly fee × 12 × Number of years= $245 × 12 × 8= $23,520
Most home insurance policies cover jewelry for $1,000 and silverware for $2,500 unless items are covered with additional insurance. If $6,000 worth of jewelry and $7,300 worth of silverware were stolen from a family without additional insurance, what amount of the claim would not be covered by insurance?
Uncovered portion of claim = (Jewelry claim − Jewelry limit) + (Silverware claim − Silverware limit)= ($6,000 − $1,000) + ($7,300 − $2,500)= $9,800
Dave and Ellen are newly married and living in their first house. The yearly premium on their homeowner's insurance policy is $200 for the coverage they need. Their insurance company offers an annual discount of 8 percent if they install dead-bolt locks on all exterior doors. The couple can also receive an annual discount of 4 percent if they install smoke detectors on each floor. They have contacted a locksmith, who will provide and install dead-bolt locks on the two exterior doors for $68 each. At the local hardware store, smoke detectors cost $12 each, and the new house has two floors. Dave and Ellen can install the smoke detectors themselves.
a. Annual discount for dead-bolt locks = Discount percent × Annual premium= 0.08 × $200= $16.00 b. Annual discount for smoke detectors = Discount percent × Annual premium= 0.04 × $200= $8
When Carolina's house burned down, she lost household items worth a total of $75,000. Her house was insured for $175,000, and her homeowner's policy provided coverage for personal belongings up to 50 percent of the insured value of the house.
a. Personal property coverage = Building coverage × Personal property coverage percent= $175,000 × 0.50= $87,500 b. Insurance payment = MIN[Claim amount, Policy limit]= MIN[$75,000, $87,500]= $75,000 Carolina will receive full payment for all of the items destroyed by the fire.
Dave and Ellen are newly married and living in their first house. The yearly premium on their homeowner's insurance policy is $650 for the coverage they need. Their insurance company offers a discount of 5 percent if they install dead-bolt locks on all exterior doors. The couple can also receive a discount of 2 percent if they install smoke detectors on each floor. They have contacted a locksmith, who will provide and install dead-bolt locks on the two exterior doors for $79 each. At the local hardware store, smoke detectors cost $11 each, and the new house has two floors. Dave and Ellen can install the smoke detectors themselves.
a. Assuming their insurance rates remain the same, how many years will it take Dave and Ellen to earn back in discounts the cost of the dead-bolts? Annual discount for dead-bolt locks = Discount percent × Annual premium= 0.05 × $650= $32.50 Recovery period = Cost of dead-bolt locks/Annual discount for dead-bolt locks= (2 × $79)/$32.50= 4.86 years b. How many years will it take Dave and Ellen to earn back in discounts the cost of the smoke detectors? Annual discount for smoke detectors = Discount percent × Annual premium= 0.02 × $650= $13.00 Recovery period = Cost of smoke detectors/Annual discount for smoke detectors= (2 × $11)/$13.00= 1.69 years c. Would you recommend Dave and Ellen invest in the safety items if they plan to stay in the house for about five years? Yes From a financial point of view, the homeowner's should invest in the safety items as they should recover most of their costs within the planned tenancy of the house. However, this may also be a safety issue, and they may wish to install these items regardless of the discounts offered.
Based on the data provided here, calculate the items requested: Annual depreciation $2,500 Annual mileage 14,040 Current year's loan interest $680 Miles per gallon 24 Insurance $785 License and registration fees $100 Average gasoline price $4.00 per gallon Oil changes/repairs $580 Parking/tolls $560
a. Calculate total annual operating cost of the motor vehicle. Total variable costs = [(Annual mileage/Miles per gallon) × Gas price per gallon] + Oil changes and repairs + Parking and tolls= [(14,040/24) × $4.00] + $580 + $560= $3,480 Total fixed cost = Depreciation + Loan interest + Insurance + License and registration fees= $2,500 + $680 + $785 + $100= $4,065 Total annual operating costs = Total variable costs + Total fixed costs= $3,480 + $4,065= $7,545 b. Calculate operating cost per mile Operating cost per mile = Total annual operating costs/Annual mileage= $7,545/14,040= $0.54, or 54 cents per mile
Based on the following data, calculate the items requested: Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent. Assume this individual has other tax deductions that exceed the standard deduction amount. Rental Costs Annual rent$ 7,780 Insurance$ 185 Security deposit$ 850 Buying Costs Annual mortgage payments $ 10,600(9,775 is interest) Property taxes $ 1,940 Down payment/closing costs$ 5,300 Growth in equity$ 825 Insurance/maintenance$ 1,450 Estimated annual appreciation$ 2,100
a. Calculate total rental cost and total buying cost Renting After-tax interest lost on security deposit = After-tax interest rate × Security deposit= 0.06 × $850= $51 7780 + 185 + 51 = 8016 Buying After-tax interest lost on down payment/closing costs = After-tax interest rate × Down payment/closing costs= 0.06 × $5,300= $318 Tax savings for mortgage interest = Tax rate × Mortgage interest= 0.28 × $9,775= $2,737 Tax savings for property taxes = Tax rate × Property taxes= 0.28 × $1,940= $543 Mortgage payments (10600) + Taxes (1940) + Insurance (1450) + After-tax interest lost on down payment, closing costs (318) MINUS Growth in Equity (825) MINUS Annual appreciation (2100) MINUS Tax savings for mortgage interest (2737) MINUS Tax savings for property taxes (543) = 8103 Renting is cheaper
Louise McIntyre's monthly gross income is $3,500. Her employer withholds $820 in federal, state, and local income taxes and $370 in Social Security taxes per month. Louise contributes $220 each month to her IRA. Her monthly credit payments for VISA and MasterCard are $125 and $120, respectively. Her monthly payment on an automobile loan is $315.
a. What is Louise's debt payments-to-income ratio? (Enter your answer as a percent rounded to 2 decimal places.) Net income = Gross income − Income taxes − Social Security taxes − IRA contribution= $3,500 − $820 − $370 − $220= $2,090 Monthly debt payments = VISA + MasterCard + Car loan= $125 + $120 + $315= $560 Debt payments-to-income ratio = Total debt payments/After-tax income= $560/$2,090= 0.2679, or 26.79% b. Is Louise living within her means? NO Experts suggest that you spend no more than 20 percent of your net (after-tax) income on consumer credit payments. 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 his/her means.
Robert Sampson owns a townhouse valued at $180,000 and still has an unpaid mortgage of $145,000. In addition to his mortgage, he has the following liabilities: Visa $730 MasterCard $330 Discover card $530 Education loan $4,500 Personal bank loan $800 Auto loan $5,500 Total$ 12,390 Robert's net worth (not including his home) is about $34,000. 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? (Round your answer to 2 decimal places.) . Debt-to-equity ratio = Total debt excluding mortgage/Net worth excluding home= $12,390/$34,000= 0.36 b. Has he reached the upper limit of debt obligations? No The upper limit of the debt-to-equity ratio is 1, so he has not reached his upper limit.
Assume a person saves $96 a month by using coupons and doing comparison shopping.
a. What is the amount of annual savings? Annual savings = Monthly savings × 12= $96 × 12= $1,152 b. What would be the future value of this annual amount over 7 years, assuming an interest rate of 5 percent? Use Exhibit 1-B. Future value = Annual savings × Future value annuity factor= $1,152 × 8.142= $9,379.58
Use the following data: Down payment (to finance vehicle) $6,800 Monthly loan payment $950 Length of loan 48months Value of vehicle at end of loan $12,800 Down payment for lease $2,600 Monthly lease payment $720 Length of lease 48 months End-of-lease charges $1,300
a. What is the total cost for buying and for leasing a motor vehicle with a cash price of $39,700? Buying: Total cost = Down payment + (Loan payment × Number of payments) − Ending vehicle value= $6,800 + ($950 × 48) − $12,800= $39,600 Leasing: Total cost = Down payment + (Lease payment × Number of payments) + End-of-lease charges= $2,600 + ($720 × 48) + $1,300= $38,460 b. Based on your answers in part a, would you recommend buying or leasing? You should choose the option with the lower total cost, which in this case is leasing.
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? I = P × r × T= $13,200 × 0.10 × 4= $5,280 b. What is the total cost of the car? Total cost = Down payment + Interest + Principal= $3,300 + $5,280 + $13,200= $21,780 c. What is the monthly payment? Monthly payment = (Interest + Principal)/Number of months= ($5,280 + $13,200)/(4 × 12)= $385 d. What is the annual percentage rate (APR)? APR = (2 × n × I)/[P(N + 1)]= (2 × 12 × $5,280)/[$13,200(48 + 1)]= 0.1959, or 19.59%
Sidney took a cash advance of $550 by using checks linked to her credit card account. The bank charges a cash advance fee of 3 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? Cash advance fee = Cash advance fee percent × Cash advance amount= 0.03 × $550= $16.50 b. What was the interest for one month at an APR of 12 percent? Monthly interest = (Annual rate/12) × Cash advance amount= (0.12/12) × $550= $5.50 c. . What was the total amount she paid? Total amount paid = Cash advance fee + Monthly interest + Cash advance amount= $16.50 + $5.50 + $550= $572.00 d. What amount would she have paid 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. Total amount paid = Cash advance amount= $550.00
Based on Exhibit 7-7, what would be the monthly mortgage payments for each of the following situations? (Round your answers to 2 decimal places.)
a.Monthly mortgage payment = Mortgage payment factor × (Mortgage amount/$1,000)= $7.91 × ($160,500/$1,000)= $1,269.56 b.Monthly mortgage payment = $5.68 × ($215,500/$1,000)= $1,224.04 or $1,224 c.Monthly mortgage payment = $6.60 × ($191,000/$1,000)= $1,260.60 or $1,261
Calculate the unit price of each of the following items:
a.Unit price = $1.96/2.0 quarts = $0.9800, or 98.00 cents per quart b.Unit price = $3.60/15 ounces = $0.2400, or 24.00 cents per ounce c.Unit price = $0.87/13 ounces = $0.0669, or 6.69 cents per ounce d.Unit price = $2.75/(300 tissues/100) = $0.9167, or 91.67 cents per 100 tissues
