Question
1. First National Bank charge 10.3 percent compounded monthly on its business loans. First United Bank charges 10.5 percent compounded semiannually. As a potential borrower,
1. First National Bank charge 10.3 percent compounded monthly on its business loans. First United Bank charges 10.5 percent compounded semiannually. As a potential borrower, to which bank would you go for a new loan? 2. Carrie Tune will receive $19,500 per year for the next 20 years as a payment for a new song she has written. If a 10 percent rate is applied, should she be willing to sell out her future rights now for $160,000? 3. Union Local School District has bonds outstanding with a coupon rate of 3.7% paid semiannually and 16 years to maturity. The yield to maturity on these bonds is 3.9%, and the bonds have a par value of $5,000, what is the dollar price of the bond? 4. You have decided to leave the small advertising firm where you are a partner. The partnership agreement among the partners states that if a partner leaves, that person's ownership in the firm is "cashed out" with an immediate payment consisting of 5 percent of last year's revenue. Last year the firm had revenue of $1 million. But your partners would rather not have to pay out this big cash flow to you this year because they are expecting much more business soon. In fact, they believe that they will be earning revenues of $1.5 million in just two years. So, they offer you a choice between taking 5 percent of last year's revenue now, or taking 4 percent of expected revenue in two years. If you believe an appropriate discount rate is 10 percent, which cash out payment should you accept? 5. Bridget Jones has a contract in which she will receive the following payments for the next five years: $1,000, $2,000, $3,000, $4,000, and $5,000. She will then receive an annuity of $8,500 a year from the end of the 6th through the end of the 15th year. The appropriate discount rate is 14 percent. If she is offered $30,000 to cancel the contract, should she do it?
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