BF 3220 Recitation Review Questions

1. You purchase a four-bedroom home in Clintonville, Ohio, for $248,000, make a 20% down payment,
and obtain a 25-year mortgage with APR of 7.5% with monthly payments for the balance. If you sell
the home after making 113 payments, what will be the balance on that loan directly after you make
the 113th payment?

2. The first yearly payment in a ten-year annuity of $27,500, is due immediately. The annuity earns
7.75% per year. How much will the annuity be worth at the end of 10 years?

3. Jenna Smith has just charged a total of $2,500 for medical supplies relating to orthopedic injuries
sustained while skateboarding. She has a Bank Seven Premium Charge account that has an APR of
15% APR, compounded monthly. The kindly Bank Seven representative has told Jenna that she only
needs to pay $40 per month until the account is paid off. If Jenna makes her $40 payment on time
each month, and makes no other charges, how many months will it take Jenna to pay off the
account?

4. Pete has just started a new business, Pete’s Portobello Mushroom Farm, Inc. He expects after tax
cash flows at the end of the first year of operation to be $59,000 and expects that these cash flows
will increase by 4% per year. If the required return for investors is 9.5%, how much is the business
worth today?

5. A young couple just purchased their dream home for $420,000. They have made a 30% down
payment, and have a 23-year, 5-month mortgage loan at an APR of 8.25%, with monthly payments
commencing one month from today. What is their monthly mortgage payment?

6. You wish to retire with $4,100,000 in exactly 47 years. You can put your money into a bank account
that pays APR of 8.8%, compounded quarterly. Assuming that you do not have to pay any taxes on
this money, how much must you deposit every quarter, starting one quarter from today, to reach
your goal?

7. You have decided to get a new car but are weighing the options of leasing vs. buying the car. The car
you want to buy costs $31,000 and you would make monthly payments over a 5-year period. At the
end of the 5 years, you think that you would be able to sell the car for $14,500. If you decide to lease
the car, you would need to pay $200 upfront and $385 per month over the same 5-year period.
Which option offers the most attractive terms given that both have a 7% APR compounded monthly?

8. Which of the following bank loans offers the least attractive interest rate to a borrower: 6.4% APR,
compounded annually; 6.3% APR, compounded monthly; 6.35% APR, compounded quarterly; or
6.45% APR, compounded semi-annually (twice per year)