MBA/MFM 253 TVM Practice Problems 2 Fall 2011
1. You are considering buying a new car. The current price of the car is $25,000. The dealer has offered you a special nominal interest rate of 3% each year for the next 3 years if you finance through the dealership.
a) What is your monthly car payment?
PV = 25,000 I = 0.25 N = 36 FV = 0 PMT =? = $727.03
25,000 = PMT (1-(1/(1.0025)36))/.0025
b) You are considering putting a $5,000 down payment on the car, what would your payment be if you did this assuming you could still get the special interest rate? $581.62
c) In either case what is the effective rate of interest you paid on the car?
1.002512=1.030416 3.0416%
2. A given rate is quoted at an effective annual rate of
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She has estimated that the cost of 1 year of college (tuition, room, and board) is currently $60,000 a year. The cost of college is estimated to increase at an annual rate of 5%. She would like you to figure out how much she would need to deposit at the end of each month for the next 18 years to cover her daughter’s tuition assuming her deposits will earn 12% each year (1 % a month) (Note your account will earn interest a 1% a month even if you are not making monthly payments after you stop paying in at the end of the 18th year).
a) What is the monthly payment $687.67
b) What if your parents want to make a $20,000 contribution to the account today? How much would each monthly payment need to be? $461.28
7. Your parents are saving for the college education of your younger sister who just turned 10. Your parents are planning on making eight payments at the end of each year of $1,500 each. Starting at the beginning of the ninth year (the end of the eighth year), your sister will then be allowed to make four equal withdraws from the account to finance her college education each year. How much will she have for books and tuition each year? Use 10% as your required return. PMT = $4,919.57
8. Your rich Aunt Oprah has recently decided that she wants to invest in your future. She has decided that for your 25th birthday she is going to open a trust account in your name. She is going to make a one time
with the interest of 4.45 percent would have to pay 1,000 dollars more than this academy year
Poor Dog, Inc. borrowed $135,000 from the bank today. They must repay this money over the next six years by making monthly payments of $2,215.10. What is the interest rate on the loan? Express your answer with annual compounding.
| |finance the balance. How much will each monthly loan payment be if they can borrow the necessary funds for 30 years at 9% per |
1. Beverly Frost bought a home for $190,000 with a down payment of $19,000 at 7% for 25 years. Since then the rate has risen to 9%. How much more would her monthly payment be if she bought the house at 9%?
8. Karen has $16,000 that she wants to invest for 1 year. She can invest this amount at The North Bank and earn 5.50 percent simple interest. Or, she can open an account at The South Bank and earn 5.39 percent interest, compounded monthly. If Karen decides to invest at The North Bank, she will:
would be $200. She wants to make sure that she can afford this monthly loan payment, so she is creating an
d. If you can earn 9% per year, how much will you have to save each year if you want to retire in 40 years with $3 million?
2. St. Luke’s Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?
FVN = FV5= PV × (1 +I)N = $500 x (1 + 0.08)5 = $500 x (1.08)5 = $734.66
1. If Mrs. Beach wanted to invest a lump sum of money today to have $100,000 when she retired at 65 (she is 40 years old today) how much of a deposit would she have to make if the interest rate on the C.D. was 5%?
At an interest rate of 15% per year (3.75% for three months, the amount to borrow equals
In question four, Janet was asked to solve a question that deals with annuity payments, specifically, ordinary annuities. It starts by asking of how much you will make if you add $2,000 every year and it is compounded by 10% interest every year. These, for the most part, are future value problems. The first one comes out to be a future value of $12,210.20, which does not satisfy the need for $20,000. The next part asks what the value would be if the interest was compounded semiannually. You have to do an equation in order to find out what the effective annual interest rate. Through this equation you come out with a value of 10.25% and after the calculator calculations you come out with a future value of $12,271.11, also not meeting the demand for that first year of college. The next part asks what payment will you need in order to get to that $20,000 number and the present value comes to be $3,275.95. Next, the case asks what original payment you would need in order
You have agreed to buy a new Subaru from a dealer. The down payment you will need to make on the new car is $9,400, which lets you take out a loan with manageable (but steep) monthly payments. You are low on ready cash, so if you can't come up with the down payment by selling your Volkswagen Jetta, you will have to borrow it at prime plus 5% interest. You are supposed to pick up the Subaru first thing tomorrow morning, so you want to sell the Jetta today.
First we need to get the present value of the annuity for the 1,500 semiannual PMTs at year 14