Ch 6

2. The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $33,000 per year forever. Suppose a sales associate told you the policy costs $478,000. At what interest rate would this be a fair deal?(Round your answer to 2 decimal places. (e.g., 32.16))

Interest Rate _____%

3.

First National Bank charges 13.9 percent compounded monthly on its business loans. First United Bank charges 14.2 percent compounded semiannually.

Calculate the EAR for First National Bank and First United Bank.(Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)

	EAR
First National	%
First United	%

4.

Beginning three months from now, you want to be able to withdraw $2,400 each quarter from your bank account to cover college expenses over the next three years. If the account pays 0.46 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next three years? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

PVA $_____

5.

You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 30 years and the payments will increase 2.5 percent per year.

If the appropriate discount rate is 6.5 percent, what is the present value of your winnings? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present Value?

6.

Suppose you are going to receive $12,900 per year for four years. The appropriate interest rate is 7.8 percent.

a-1	What is the present value of the payments if they are in the form of an ordinary annuity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present value

$

a-2	What is the present value if the payments are an annuity due?(Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present value

$

b-1	Suppose you plan to invest the payments for four years. What is the future value if the payments are an ordinary annuity?(Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Future value

$

b-2	Suppose you plan to invest the payments for four years. What is the future value if the payments are an annuity due? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)

Future value

$

7.Prepare an amortization schedule for a five-year loan of $71,000. The interest rate is 7 percent per year, and the loan calls for equal annual payments. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Year	Beginning Balance	Total Payment	Interest Payment	Principal Payment	Ending Balance
1	$	$	$	$	$
2
3
4
5

How much interest is paid in the third year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Interest paid

$

The interest rate is 7 percent per year, and the loan calls for equal annual payments. How much total interest is paid over the life of the loan? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Total interest paid

$

8.You are looking at a one-year loan of $15,500. The interest rate on a one-year loan is quoted as 11.8 percent plus three points. What is the EAR? (Round your answer to 2 decimal places. (e.g., 32.16))

Effective annual rate

%

9.

You have 42 years left until retirement and want to retire with $4.8 million. Your salary is paid annually, and you will receive $76,000 at the end of the current year. Your salary will increase at 2.6 percent per year, and you can earn a 10.0 percent return on the money you invest. If you save a constant percentage of your salary, what percentage of your salary must you save each year?(Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Percent of salary to save

%