The document contains 14 multi-part questions regarding finance concepts such as interest calculations, annuities, bonds, and capital budgeting. It asks the reader to calculate interest owed on a credit card in the first year, monthly savings needed to become a millionaire at retirement, future value of an annually growing annuity, monthly payments on an auto loan, and more. It also provides short explanations regarding the effect of interest rate changes on bond prices and criteria for evaluating investment projects.
The document contains 14 multi-part questions regarding finance concepts such as interest calculations, annuities, bonds, and capital budgeting. It asks the reader to calculate interest owed on a credit card in the first year, monthly savings needed to become a millionaire at retirement, future value of an annually growing annuity, monthly payments on an auto loan, and more. It also provides short explanations regarding the effect of interest rate changes on bond prices and criteria for evaluating investment projects.
The document contains 14 multi-part questions regarding finance concepts such as interest calculations, annuities, bonds, and capital budgeting. It asks the reader to calculate interest owed on a credit card in the first year, monthly savings needed to become a millionaire at retirement, future value of an annually growing annuity, monthly payments on an auto loan, and more. It also provides short explanations regarding the effect of interest rate changes on bond prices and criteria for evaluating investment projects.
The document contains 14 multi-part questions regarding finance concepts such as interest calculations, annuities, bonds, and capital budgeting. It asks the reader to calculate interest owed on a credit card in the first year, monthly savings needed to become a millionaire at retirement, future value of an annually growing annuity, monthly payments on an auto loan, and more. It also provides short explanations regarding the effect of interest rate changes on bond prices and criteria for evaluating investment projects.
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Homework 3
1. You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 1.5 percent per year, compounded monthly for the first six months, increasing thereafter to 18 percent compounded monthly. Assuming you transfer the $5,000 balance from your existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year?
r n∗m Answer: FVA= PV*(1+ ¿ ¿ n
( ) 6 0.015 = 5000* 1+ 12
= 5037.62
( ) 6 0.18 FVA= 5037.62* 1+ 12
= 5508.35
Interest= 5508.35 – 5000 = 508.35
2. You want to be a millionaire when you retire in 40 years. How much do you have to save each month if you can earn a 12 percent annual return? How much do you have to save if you wait 10 years before you begin your deposits? 20 years?
12% Answer: r = =1 %=0.01 n = 40*12 = 480 12 n (1+r ) −1 FVA = PMT * r 480 (1+0.01) −1 $1,000,000 = PMT * 0.01 PMT = $85.00 You must save $85.00 Per month
Now the number of payments is n = 30 years * 12 = 360. So, the payment is: n (1+r ) −1 FVA = PMT * r
(1+0.01)360 −1 $1,000,000 = PMT * 0.01 PMT = $286.13 If you wait 10 years, you must save $286.13 Per month
Now the number of payments is n = 20 years * 12 = 240. So, the payment is: (1+r )n−1 FVA = PMT * r 240 (1+0.01) −1 $1,000,000 = PMT * 0.01 PMT = $1,010.86 If you wait 20 years, you must save $1010.86 Per month
3. Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $50,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 5 percent of your annual salary in an account that will earn 11 percent per year. Your salary will increase at 4 percent per year throughout your career. How much money will you have on the date of your retirement 40 years from today? (Hint: calculating growing annuity)
Answer: current salary = 50000 g = 4%
Next salary = 50000 * ( 1 + 0.04 ) = 52000 Savings = 52000 * 5% = 2600 r = 11% = 0.11 n = 40 CF = 2600
[ ( )] n CF 1+ g PVQA = ∗ 1− r−g 1+r
[ ( )] 40 2600 1+ 0.04 = ∗ 1− 0.11−0.04 1+0.11
= 34399 FV = PV * (1+r )n
= 34399 * ( 1+0.11 )40
= 2235965
4. You want to buy a new sports car from Muscle Motors for $68,000. The contract is in the form of a 60- month annuity due at an 7.85 percent APR. What will your monthly payment be? (Hint: calculating annuities due)
PV = $68,000 interest rate = 7.85% = 0.785 number of years = 60 months = 5 years
= $1374 5. Prepare an amortization schedule for a fi ve-year loan of $42,000. The interest rate is 8 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? Rework assuming that the loan agreement calls for a principal reduction of $8,400 every year instead of equal annual payments.
Answer: Loan = Payments *
[ 1−( 1+r )−n ] r
42,000 = Payment * [ 1−( 1+0.08 ) ] −5
0.08 Payment = 10,519.17
6. Suppose you buy a 7 percent coupon, 20-year bond today when it’s first issued. If interest rates
suddenly rise to 15 percent, what happens to the value of your bond? Why? Answer: The value of your bond will decrease. Because the current market rate is 15%, investor could earn 15% instead of 7%. Interest rates and bond prices have an inverse relationship.
The value of your bond will
decrease. Because the current market rate is 15%, investor could earn 15% instead of 7%. Interest rates and bond prices have an inverse relationship. The value of your bond will decrease. Because the current market rate is 15%, investor could earn 15% instead of 7%. Interest rates and bond prices have an inverse relationship. The value of your bond will decrease. Because the current market rate is 15%, investor could earn 15% instead of 7%. Interest rates and bond prices have an inverse relationship. 7. Grohl Co. issued 11-year bonds a year ago at a coupon rate of 6.9 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.4 percent, what is the current bond price?
8. The McKeegan Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,100 every six months over the subsequent eight years, and finally pays $1,400 every six months over the last six years. Bond N also has a face value of $20,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. If the required return on both these bonds is 7 percent compounded semiannually, what is the current price of bond M? Of bond N?
9. Resnor, Inc., has an issue of preferred stock outstanding that pays a $5.50 dividend every year in perpetuity. If this issue currently sells for $108 per share, what is the required return?
10. Great Pumpkin Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 14 percent return on the stock for the fi rst three years, a 12 percent return for the next three years, and a 10 percent return thereafter. What is the current share price? 11. Teder Corporation stock currently sells for $64 per share. The market requires a 10 percent return on the fi rm’s stock. If the company maintains a constant 4.5 percent growth rate in dividends, what was the most recent dividend per share paid on the stock?
12. An investment project costs $15,000 and has annual cash flows of $4,300 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5 percent? If it is 19 percent?
13. A project that provides annual cash flows of $28,500 for nine years costs $138,000 today. Is this a good project if the required return is 8 percent? What if it’s 20 percent? At what discount rate would you be indifferent between accepting the project and rejecting it
14. The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $85,000 for the fi rm during the first year, and the cash flows are projected to grow at a rate of 6 percent per year forever. The project requires an initial investment of $1,400,000. a. If Yurdone requires a 13 percent return on such undertakings, should the cemetery business be started? b. The company is somewhat unsure about the assumption of a 6 percent growth rate in its cash flows. At what constant growth rate would the company just break even if it still required a 13 percent return on investment?
