Fin515 – week 2 – problem set

Week 2 Downside Set

Reply the next questions and remedy the next issues within the house offered. When you find yourself accomplished, save the file within the format flastname_Week_2_Problem_Set.docx, the place flastname is your first preliminary and also you final title, and submit it to the suitable dropbox.

Chapter four (pages 132–136):

three. Calculate the longer term worth of $2000 in

a. 5 years at an rate of interest of 5% per yr;

b. ten years at an rate of interest of 5% per yr; and

c. 5 years at an rate of interest of 10% per yr.

d. Why is the quantity of curiosity earned partly (a) lower than half the quantity of curiosity earned partly (b)?

 

four. What's the current worth of $10,000 obtained

a. twelve years from immediately when the rate of interest is four% per yr;

b. twenty years from immediately when the rate of interest is eight% per yr; and

c. six years from immediately when the rate of interest is 2% per yr?

 

5. Your brother has supplied to present you both $5,000 immediately or $10,000 in 10 years. If the rate of interest is 7% per yr, which choice is preferable?

 

6. Take into account the next options.

i. $100 obtained in 1 yr

ii. $200 obtained in 5 years

iii. $300 obtained in 10 years

 

a. Rank the options from most respected to least helpful if the rate of interest is 10% per yr.

b. What's your rating if the rate of interest is barely 5% per yr?

c. What's your rating if the rate of interest is 20% per yr?

 

 

eight. Your daughter is presently eight years outdated. You anticipate that she will likely be going to varsity in 10 years. You want to have $100,000 in a financial savings account to fund her training at the moment. If the account guarantees to pay a hard and fast rate of interest of three% per yr, how a lot cash do it's worthwhile to put into the account immediately to make sure that you should have $100,000 in 10 years?

 

9. You might be pondering of retiring. Your retirement plan pays you both $250,000 instantly on retirement or $350,000 5 years after the date of your retirement. Which various must you select if the rate of interest is

a. zero% per yr;

b. eight% per yr; and

c. 20% per yr?

 

14. You could have been supplied a singular funding alternative. Should you make investments $10,000 immediately, you'll obtain $500 1 yr from now, $1,500 2 years from now, and $10,000 10 years from now.

a. What's the NPV of the chance if the rate of interest is 6% per yr? Must you take the chance?

b. What's the NPV of the chance if the rate of interest is 2% per yr? Must you take it now?

 

36. You might be pondering of buying a home. The home prices $350,000. You could have $50,000 in money that you should utilize as a down cost on the home, however it's worthwhile to borrow the remainder of the acquisition value. The financial institution is providing a 30-year mortgage that requires annual funds and has an rate of interest of seven% per yr. What's going to your annual cost be for those who join this mortgage?

 

37. You want to purchase the home and take the mortgage described in Downside 36. You'll be able to afford to pay solely $23,500 per yr. The financial institution agrees to assist you to pay this quantity every year, but nonetheless borrow $300,000. On the finish of the mortgage (in 30 years), you have to make a balloon cost; that's, you have to repay the remaining steadiness on the mortgage. How a lot will this balloon cost be?

 

38. You could have simply made a suggestion on a brand new house and are in search of a mortgage. You'll want to borrow $600,000.

a. The financial institution affords a 30-year mortgage with mounted month-to-month funds and an rate of interest of zero.5% monthly. What's the quantity of your month-to-month cost for those who take this mortgage?

b. Alternatively, you will get a 15-year mortgage with mounted month-to-month funds and an rate of interest of zero.four% monthly. How a lot would your month-to-month funds be for those who take this mortgage as an alternative?

 

*A.1. This downside is from the Appendix to Chapter four.

Your grandmother purchased an annuity from Rock Stable Life Insurance coverage Firm for $200,000 when she retired. In change for the $200,000, Rock Stable pays her $25,000 per yr till she dies. The rate of interest is 5%. How lengthy should she reside after the day she retired to return out forward (that's, to get extra in worth than what she paid in)?

 

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