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principles of finance

Questions and Answers of Principles Of Finance

a. Bellon Bank is offering 12% stated annual interest rate, compounded once a year.
13. (FV calculation with stated rate) You plan to put $1,000 in a savings plan and leave it there for 5 years. You can choose between various alternatives. How much will you have in 5 years under
You can buy the car for the list of $99,000. In this case, the dealer is willing to take $39,000 as an initial payment. The remainder of$60,000 is a “zero- interest loan” to be paid back in equal
You can buy the car for $90,000 in cash and get a $9,000 discount in the bargain.
12. (EAIR in loans) You’re considering buying a new top- of- the- line luxury car.The car’s list price is $99,000. The dealer has offered you two alternatives for purchasing the car:
c. Compute an amortization table which shows the amount of interest pay each month.
b. What is the EAIR of the mortgage?
a. What is the monthly payment you will pay the bank?
You have to pay the bank an initiation charge of $1,500 and 1 point.
The annual interest rate on the mortgage is 8%, compounded monthly (meaning: 8% 12 = 2 3% per month).
The mortgage will be repaid in equal monthly payments over 36 months, starting 1 month from now.
The mortgage is for the full amount of $250,000.
11. (Mortgage + EAIR) You just bought the first floor of the famous “Egg- Plant”Building for $250,000. You plan to rent the space to convenience stores. Your banker has offered you a mortgage
c. Compute the total interest paid in each year of the mortgage. You can base your answer on the amortization table or investigate the Excel function Cumipmt.
b. Will the EAIR of the mortgage change if the loan period is 6 years?
a. Calculate the monthly payment on the mortgage, show the amortization table, and compute the EAIR.
10. (Mortgage + EAIR) Your local bank has offered you a 20- year, $100,000 mortgage. The bank is charging 1.5 points, with “processing” costs of $750;both points and processing costs are deducted
c. Present an amortization table which shows the amount of effective interest you pay each year.
b. Calculate the EAIR.
a. Calculate the annual mortgage payment.
9. (Mortgage + EAIR + processing fee) Your local bank has offered you a 20- year, $100,000 mortgage. The bank is charging 1.5 points, with “processing”costs of $750; both points and processing
e. Suppose you had invested $100 in each of the two funds at the beginning of 2011. Show that the total amount you would have in each fund (see parta) can be written as $ * * 100 5 e raverage
d. Compute the annual continuous returns for Dull Fund and Lively Fund for each of the years 2011– 2015. What is the average continuous return raverage continuous for each fund (reminder: value
c. Is there a conclusion you can draw from this example?
b. What was the effective annual interest rate (EAIR) paid by each of the funds over the 5- year period 2011– 2015?
a. Suppose you had invested $100 in each of the two funds at the beginning of 2011. How much would you have at the end of 2015?
7. (Average compounding rate) WindyRoad is an investment company which has two mutual funds. The WindyRoad Dull Fund invests in boring corporate bonds, and its Lively Fund invests in “high- risk,
3. (APR vs. EAIR) A recent notice from your credit card company included the following statement:Your annual percentage rate for cash advances is the U.S. Prime Rate plus 14.99%, but such cash
Credit card 3 charges 18.90% annually, on a daily basis Rank the cards on the basis of EAIR.
Credit card 2 charges 19% annually, on a weekly basis
Credit card 1 charges 19% annually, on a monthly basis.
2. (APR vs. EAIR) You’ve been offered three credit cards:
b. What is the mortgage EAIR?
a. Calculate the monthly mortgage payments.
1. (APR and EAIR) Your local bank has offered you a mortgage of $100,000.There are no points, no origination fees, and no extra initial costs (meaning:you get the full $100,000). The mortgage is to
The reason that the fees have a smaller effect for the second mortgage is that they are spread out over a much longer term.
For the 30- year mortgage discussed above, the same initial fees increase the EAIR from 8% to 8.4721%.
For the 1-year mortgage discussed previously, the 1.5% initial fee increased the EAIR of the mortgage from 8% to 11.41%.
c. What is the interest payment on the fourth installment?
b. Compute an amortization table for the loan.
a. What is the outstanding balance of the loan after 3 years?
14. (Equal principal payment loan) You took a 5- year, $100,000 loan. The loan has equal principal payments. The loan carries a 6% annual interest rate and is paid back in annual payments.
c. (Challenging) Ten years later (after 120 installments), your bank manager offers to refinance your mortgage with a new loan carrying a 0.9% interest rate for a one- time commission. What is the
b. What is the outstanding principal balance of the mortgage after 5 years(i.e., after 60 installments)?
a. Compute the monthly installments on the mortgage.
13. (Mortgage, refinancing a loan) You financed the purchase of a $300,000 apartment with a down payment in cash of 20% of the purchase price. The remaining 80% is financed with a mortgage with a 1%
d. What is the principal payment on the fourth payment?
c. What is the outstanding loan balance after the third installment?
b. Show an amortization table for the loan.
a. What is the fixed amount to be paid in each installment?
12. (Mortgage, amortization table) “Iris” company took a 5- year, $150,000 loan carrying a 10% annual interest rate. The loan will be paid back in five equal annual installments.
c. What is the outstanding balance of the loan after 4 years?
b. Break down the 10th payment to principal payment and interest payment.
11. (Mortgage, finding r, payment breakdown, and outstanding balance) You are interviewing with one of the largest mortgage brokerage firms. Your future boss asks you to analyze a $150,000 mortgage
c. Four years after taking the loan, Ruth and Moab want to repay the loan. What is the outstanding balance of the loan?
b. Break down the 10th payment to the principal and interest portion.
a. Show an amortization table for the loan.
7. (An equal term loan, amortization table) Ruth and Moab have just purchased their dream apartment. They have financed the purchase with a term loan of$150,000 (mortgage). The loan term is for 10
e. After 8 years, when the market interest rate has dropped to 8%, the company would like to refinance the loan. What is the “refinancing fine” the bank would charge the firm if it would like to
d. What is the outstanding balance of the loan after 8 years?
c. Show an amortization table for the loan.
b. Since the interest payment is tax deductible, Omer would like to know what the interest rate portion of the first payment is. Can you provide an answer?
. What is the annual payment on the loan?
6. (An equal payment loan, refinancing) Omer is the CFO of ABC Corp. The firm just took a $1M loan with 20 equal annual payments and an annual interest rate of 10%.
b. A financial advisor approaches you and offers to refinance the loan for a consultancy fee of $8,000. The new loan has the same characteristics as the current loan but carries a 0.75% monthly rate.
a. What is the monthly payment on the loan?
5. (Interest-only loan, refinancing) Five years ago, you took an interest- only loan. The loan carries a 1% monthly interest rate, and the loan principal is$150,000. The loan has two more years (24
b. What is the highest loan that Christine can take assuming the monthly interest rate on the loan is 0.75%?
a. What is the highest loan that Christine can take? (Hint: Since the loan amount is increasing with the maturity, answer assuming the loan is perpetual.)
4. (Balloon loan) Christine would like to take a loan. The loan carries a 1%monthly interest rate. Christine can only pay back $800 every month.
b. What is the outstanding balance of the loan after 7 years?
a. Show the loan amortization table.
3. (Interest-only loan) Your friend took a $50,000 loan. The loan is a 15- year, 5% “interest-only” loan (paying interest in the loan period and the principal in one installment at the end).
b. What is the outstanding balance of the loan at the end of any month?
a. Show an amortization table for the loan.
2. (Interest-only loan, amortization table) You are taking an interest-only $10,000 loan. The loan is to be paid in 2 years and carries monthly interest payments of 0.5%.
c. Assume you borrowed the $900 carrying a 5% interest rate for the deal period, bought the boxes and decorated them, but you have just found out that the market price of the decorated boxes has
suppose the following
b. Suppose that in addition to your own $100, you can borrow $900 at 5% interest. The whole amount of $1,000 will be invested in boxes.
a. You have $100 to invest in the boxes (and decorations). What are your profits assuming the deal goes through? What is the return in percentage on your investment?
1. (Leverage) Your friend presents you with the following deal: You can buy a box for $9, decorate it at a cost of $1, and sell it in 1 year for $11.
If the contractual value is less than market value, consider refinancing the loan. You may have to consider refinancing costs (we’ve ignored them thus far, but consider them in Section 4.9).
The market value of a loan at the end of year t is the present value of the remaining total payments of the loan’s payments in years t + 1, t + 2, …, N discounted at the market interest rate.
3. What is the nth payment of the loan, and what is the interest and principal portion of this payment?The contractual value of a loan at the end of year t is the remaining principal from the
2. What is the loan’s remaining balance after n payments?
1. What is the loan amortization table for the loan?
d. Which project should the company choose if the projects are not mutually exclusive and the company faces a $1,000K budget constraint?
c. Which project should the company choose if the projects are mutually exclusive?
b. Complete the missing values from the table.
a. Use Project D to show that the discount rate (cost of capital) is 16.67%per annum.
All the projects carry the same risk and should be discounted with the same discount rate.
You can invest in fraction of projects—for example, you can invest half of the cost and receive half of the cash flows.
All cash flows presented in the table are received on the last day of the year.
What is the highest yearly lease that Emma is willing to pay?
b. A leasing company offers Emma the same car under a leasing agreement.
a. How often should Emma replace the car?
The cost of capital is 0.5% per month.What should you recommend your friend (buying or leasing)? Explain
She can lease the same car. The leasing cost is $350 to be paid at the end of each month and is expected to stay at the same level forever.
The car of her dreams costs $20,000. The car is expected to be replaced every 5 years. At the end of the fifth year, the car is expected to be sold at $5,000. Since she likes the car so much, she
20. (EAC) Your friend is not sure whether she should buy or lease a car. She presents you the following financial information:

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