(1) Explain the concept of time value of money and provide an example from your own life where that concept is important.

(2) Three friends are offered the choice of $500 today or $1000 3 years from today. One chooses the $500, one chooses $1000 and the third says it doesnt matter. Comment on the choices each of the friends made and explain why they might have done so.

(3) What size loan must we take today with a 10% compound interest rate to have end-of-year payments of $1400, $1320, $1240, $1160, and $1080 for the next five years, respectively? In other words, if you take out a loan today, and after making all five payments, above, the loan is paid off, what is the value of that loan? Draw the cash flow diagram for this scenario.

(4) (a) You just took out a $110 000 mortgage for a piece of lake-front land in northern Alberta. You negotiated with your bank for a 9.5% nominal interest rate, compounded monthly, and a 20-year amortization period (the duration over which the loan is calculated to be repaid). What are your monthly payments? Note that 9.5% nominal interest rate compounded monthly means you have a monthly interest rate of 9.5%/12=0.7917%. (b)) A short time later, youre interested in refinancing your mortgage. How much do you still owe after three years?