EASC345 Tutorial

Chapter 5
Question 4
An investment offers $3,850 per year for 15 years, with the first
payment occurring one year from now. If the required return is 6
percent, what is the value of the investment? What would the value be
if the payments occurred for 40 years? For 75 years? Forever?
Question 10
The Maybe Pay Life Insurance Co. is trying to sell you an investment
policy that will pay you and your heirs $30,000 per year forever. If the
required return on this investment is 5.6 percent, how much will you
pay for the policy?
Question 14
First National Bank charges 13.8 percent compounded monthly on its
business loans. First United Bank charges 14.1 percent compounded
semiannually. As a potential borrower, which bank would you go to for
a new loan?
Question 15
Evergreen Credit Corp. wants to earn an effective annual return on its
consumer loans of 18.2 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.
Question 17
Spartan Credit Bank is offering 8.3 percent compounded daily on its
savings accounts. If you deposit $7,500 today, how much will you have
in the account in 5 years? In 10 years? In 20 years?
Question 20
You want to buy a new sports coupe for $84,500, and the finance office
at the dealership has quoted you a loan with an APR of 4.7 percent for
60 months to buy the car. What will your monthly payments be? What
is the effective annual rate on this loan?
Question 30
You want to buy a new sports car from Muscle Motors for $65,500. The
contract is in the form of a 60-month annuity due at an APR of 4.1
percent. What will your monthly payment be?
Question 46
Suppose you are going to receive $14,500 per year for five years. The
appropriate discount rate is 7.1 percent.
a) What is the present value of the payments if they are in the form of
an ordinary annuity? What is the present value if the payments are
an annuity due?
b) Suppose you plan to invest the payments for five years. What is the
future value if the payments are an ordinary annuity? What if the
payments are an annuity due?
c) Which has the higher present value, the ordinary annuity or annuity
due? Which has the higher future value? Will this always be true?
Question 50
A 15-year annuity pays $1,750 per month, and payments are made at
the end of each month. If the interest rate is 9 percent compounded
monthly for the first seven years, and 6 percent compounded monthly
thereafter, what is the value of the annuity today?
Question 55
Prepare an amortization schedule for a five-year loan of $58,500. The
interest rate is 6 percent per year, and the loan calls for equal annual
payments. How much interest is paid in the third year? How much total
interest is paid over the life of the loan?