Can someone please help me answer #14-33 all parts.

FINC 2400 THOMMESEN Fall 2015 Extra credit financial calculator problems Please fill out the answer sheet on the last page(s), and hand it to me in class, leave it in my department mail box, or shove it under my door. You can get a total of 250 points on this problem set. It will be worth 5% of your course grade. Each question is worth the number of points noted. Partial credit will be given. The answers are due on Wednesday, December 2, by 5:00 p.m. NOTE that this is intended to be an individual exercise, not one big group project. Obvious cases of copying of answers will not be rewarded. Instructions: The problem set requires the use of a financial calculator. You will need to be familiar with the TVM functions (N, I, PV, PMT, FV) and the cash flow functions (CFj, Nj, IRR, NPV). Unless otherwise instructed, set your calculator to 12 payments per year and to END mode. For each question, clear the calculator of old data before starting. Unless otherwise instructed, round off all dollar amounts to the nearest cent, and for all interest rates use 2 decimals in the answer. Please note that some of the questions require you to use a 2-step process, calculating an intermediate value before proceeding to the required answer. Terminology: a \"balloon payment\" is a large payment made at the end of a loan, to pay off any remaining principal. 1 Hints: A. About the TI BA-II calculator: this calculator reports IRR as interest per period (month). Multiply by 12 to get the yearly rate. B. About the HP-10BII calculator: when entering cash flows, this calculator will not accept Nj greater than 99. So to enter a cash flow that consists of paying out $30 for 480 months, you'd have to enter the same $30 amount six times (CFj) and enter the number of periods (Nj) as 90, 90, 90, 90, 90, and 30 which adds up to 480. The TI allows you to specify Nj=480 directly. Here are some ways previous students managed to find incorrect answers: C. Not using a financial calculator. Using a common calculator is possible, but considering that worst case you'd need to make something like (480+180) monthly calculations for a problem to get the right answer, that would be rather inefficient. D. Forgetting to clear your calculator of old data before starting a new problem. E. Forgetting about the role of compounding: in these problems you CANNOT just add together 360 payments and tack on 6% interest at the end! F. Compounding interest yearly when this is not called for. Be sure to set your calculator to the correct number of payments per year for the problem at hand! (1, 2, 4, or 12 are most common.) G. Entering the interest rate incorrectly. Both the TI and the HP require you to enter the YEARLY interest rate. If you have set the number of payments per year correctly, the calculator keeps track of the interest per period. H. Trying to use the TVM buttons (N,I/YR,PV,PMT,FV) for data entry instead of the cash flow buttons (CFj, Nj) for a problem involving uneven cash flows. I. Stopping half-way through a problem, reporting the intermediate moneyin-the-bank figure instead of the monthly payment or benefit that was asked about. J. Forgetting that the number of months may be different between part 1 and part 2 of a problem (e.g., N=480 while working and N=180 after retirement.) K. Copying someone else's answers, but being sloppy (or uncertain) about the signs. Negative answers are possible in IRR and NPV calculations. 2 Simple compounding problems (yx, ex) 1. [5 p] Your brother borrows $1,200 from you. Since he's family, you allow him to pay simple interest at 5%. After 6 years, how much does he owe you? 2. [5 p] Alternatively, you could put your $1,200 in the bank where they pay compound interest. If the bank pays you 5% interest, compounded yearly, how much do you have in your account after 6 years? 3. [5 p] If the bank pays a nominal interest of 5% p.a., what is the maximum EAR you could earn on your money? Under what circumstances would that happen? 4. [15 p] You put $1,000 in the bank at a nominal interest rate of 6% p.a. How much will be in your account after 10 years if the bank: (a) compounds yearly (b) compounds monthly (c) compounds daily 5. [5 p] You deposit $1,500 in the bank today. After 5 years, you are able to withdraw $2,163.48. Assuming yearly compounding, what interest rate did you earn? 6. [5 p] You deposit $1,500 in the bank today. After 5 years, you are able to withdraw $2,163.48. What Effective Annual Return (EAR) did you earn? 7. [5 p] You deposit $1,200 in the bank today. You earn 8% interest, compounded quarterly. How many quarters will it take before your bank account contains at least $3,000? 3 Simple bond problems: consol bonds 8. [10 p] A $1,000 consol bond has a coupon rate of 8%. It pays annual coupons. (a) [5 p] If the current market rate is 6%, how much will this bond sell for? (b) [5 p] If it sells for $910, what is the current market interest rate? Simple bond problems: Zero-Coupon Bonds 9. [5 p] A 3-year zero coupon bond with a face value of $1,000 is offered with a return of 7.5%. What does it sell for? 10. [5 p] A 1-year zero coupon bond with a face value of $1,000 just sold for $888.00. What is the expected rate of return on this bond? Simple bond problems: coupon bonds 11. [5 p] A $1,000 face value coupon bond has an 8.2% coupon rate. It will pay semi-annual coupons. How much will the bond holder receive with each coupon payment? 12. [5 p] A 10-year $1,000 face value coupon bond carries a coupon rate of 7.0%. It pays semi-annual coupons. The current market interest rate is 6%. How much will this bond sell for? (Calculate its FPV.) 13. [5 p] You purchase a 5-year $1,000 face value coupon bond for $930. The bond carries a 6% coupon rate and it pays semi-annual coupons. What is the return (Err, YTM) going to be if you hold this bond until maturity? (Calculate its IRR.) 4 Simple amortization (TVM) problems Use the N, I, PV, PMT, FV buttons to enter data and solve problems. Set your calculator to 12 payments per year and END mode. Be sure to clear the calculator before you start a new problem! 14. [5 p] You borrow $200,000 at 5.75% over 30 years. What is your monthly payment? 15. [5 p] You borrow $150,000 over 20 years. Your monthly payment is $1377.76. What interest rate are you paying? 16. [5 p] You feel you can afford to pay no more than $2,000 per month on a mortgage. Current market rates are 6.5% p.a. How much can you borrow if you want 20 years to pay off the loan? 17. [5 p] You borrow $300,000 at 7.0% over 30 years. After 10 years of making payments, you sell the home. What is the payoff (remaining balance) on the mortgage? 18. [5 p] You want to borrow $225,000 at 8%. If you make payments of $1,750.00 per month, how many payments do you have to make to pay off the loan? (Round up.) Simple amortization: annuities due (maybe) -> For questions 20 - 21, ask yourself whether we are dealing with a normal annuity or an annuity due, and calculate accordingly. 19. [5p.] You have won $386 million in the Mega lottery, to be paid out in 20 equal yearly installments. You are offered a lump sum payment instead. If your required rate of return is 6.2%, how large does the lump sum have to be for you to take it over the yearly payments? 20. [10 p.] You have decided to upgrade your mode of transportation by investing in a Lamborghini priced at $240,000. You are offered a 6-year car loan at 8%, or a 5-year lease at 7.6%. (a) what would your monthly car payment be for the loan? (b) what would be your monthly lease payment? 5 6 Yields, taxes, inflation 21 (a) [5 p.] You are offered a 30-year Treasury bond which has 25 years left until it matures. It pays semi-annual coupon payments at a coupon rate of 8%. The current market price for the bond is $817.44. What yield would you earn if you held this bond to maturity? (b) [5 p.] Your personal tax rate for federal income taxes is 28%, and your state taxes investment income at a flat rate of 7%. What is your net aftertax yield to holding the above bond? (c) [5 p.] If during the time you own this bond we have an average inflation rate of 7.5% per year, what is your real after-tax return to this investment? Bonds: returns before and after taxes 22. [15 p] Assume you are in the 35% federal income tax bracket, and that your state income tax is 8%. Assuming they all pay a nominal (pre-tax) return of 12%, compute the after-tax yields on: (a) [5 p] a Treasury bond: (b) [5 p] a municipal bond: (c) [5 p] a corporate bond: General TVM questions (intermediate level) 23. [5 p] You borrow $300,000 at 8% over 10 years, with a balloon payment of $100,000. What is your monthly payment? 24. [5 p] [Two-step] You are offered a 15-year mortgage for $250,000 at 5.5%. If you want the same size monthly payment, how much could you borrow if you stretch the payback to 25 years, but the bank wants 6.05% for the longer loan? Applied TVM questions (intermediate) 7 25. [15 p] You are negotiating about financing with a car dealer for the $24,000 vehicle you have decided to acquire. He offers you either a loan or a lease, and they both happen to be for 6 years with a monthly payment of $400.00. (a) [5 p] What is the interest rate on the car loan? (b) [5 p] What is the interest rate on the lease? (c) [5 p] Which deal is preferable? 26. [5 p] You want to purchase an $18,000 car. You have two financing options: (1) 0% financing for 5 years; (2) $3,000 cash back and 7.5% financing for 6 years. How much less do you pay per month with the preferred alternative? 27. [5 p] You need to borrow $300,000 to buy a house. The going rate for a 30-year mortgage is 5.75%. Your bank offers a lower rate of 5.35% if you pay 2 points. Should you take their offer? Calculate the NPV of paying the points. 28. [10 p] In this week's Powerball lottery, the lucky winner walked away with a $294 million prize, to be paid in 26 yearly installments of $11.3 million. The first installment will be paid immediately, of course. She was given the alternative of taking a lump sum of $168 million. (a) [5 p] What discount rate was used to calculate the lump sum? (b) [5 p] If the relevant discount rate (market rate) had been 9.5% instead, what would the lump sum have been? 8 Applied TVM questions: saving vs. borrowing 29. [15 p] You want to purchase a $50,000 car. (a) [5 p] You are able to obtain a 7-year loan at 6.75% for the full amount. What would your monthly payment be? (b) [5 p] You decide instead to save money first and then purchase the car. You earn 3.5% interest on your savings account. If you save the same amount each month as that calculated in (a), how many months would you have to save to be able to purchase the car? (Round up.) (c) [5 p] How much more do you end up paying for the car (out of your own pocket) if you borrow than if you save first? 30. [20 p] You purchase a $240,000 home. (a) [5 p] You put down a 10% down payment and take out a 30-year loan at 5.25%. When the loan has been paid off, how many dollars have you paid for the house total? (b) [5 p] If instead you were able to carry a 15-year loan at 5.00% for the same house, how much would the house cost you now? (c) [5 p] If you saved the amount of the loan instead at 3.5% interest, making monthly deposits equal to the payments on the 15-year loan, how long would you have to save? (Round up the number of months.) (d) [5 p] How much would the house cost you out of pocket in this case? 31. [5 p] With a given interest rate, which type of mortgage makes you pay the most interest over the life of the loan, a 15-year or a 30-year loan? 32. [5 p] With a given interest rate, which type of mortgage makes you pay the most principal over the life of the loan, a 15-year or a 30-year loan? Saving for retirement 9 33. (a) [5 p] You decide that you want to be able to pay yourself $10,000 per month after you retire at age 66. Being paranoid about how long you'll live, you decide that you will only live off the interest on your savings (instead of eating up your principal over time). If the expected interest rate is 5.5%, how much would you have to have in the bank at age 66? [Ignore any tax angles.] (b) [5 p] If you start saving at age 22, and you expect to earn a 7.5% return on your investments, how much would you have to save per month to get to the amount you calculated in (a) by the age of 66? 10 FINC 2400 Thommesen Extra credit work - Answer sheet Fall 2015 Due: 12/2/15 Class: FINC __________ Time: __________ NAME: __________________________________ (Note: if I can't read your name, I can't give you credit ...) 1. ____________________ 10. ___________________ 2. ____________________ 11. ___________________ 3. ____________________ 12. ___________________ 4a. ____________________ 13. ___________________ 4b. ____________________ 14. ___________________ 4c. ____________________ 15. ___________________ 5. ____________________ 16. ___________________ 6. ____________________ 17. ___________________ 7. ____________________ 18. ___________________ 8a. ____________________ 19. ___________________ 8b. ____________________ 20a. __________________ 9. ____________________ 20b. __________________ 11 (Page 2) 21a. ____________________ 28a. __________________ 21b. ____________________ 28b. ___________________ 21c. ____________________ 29a. ___________________ 22a. ____________________ 29b. ___________________ 22b. ____________________ 29c. ___________________ 22c. ____________________ 30a. ___________________ 23. ____________________ 30b. ___________________ 24. ____________________ 30c. ___________________ 25a. ____________________ 30d. ___________________ 25b. ____________________ 31. ___________________ 25c. ____________________ 32. ___________________ 26. ____________________ 33a. ___________________ 27. ____________________ 33b. ____________________ 12