Chapter 5

1. At the beginning of your freshman year, your favorite aunt and uncle deposit $10,000 into a four-year bank certificate of deposit (CD) that pays 4% annual interest. You will receive the money in the account (including the accumulated interest) if you graduate with honors in four years. How much will there be in the account after four years?

2. Your company's 2013 earnings per share were $1.62, and its growth rate during the prior 10 years was 8.75% per year. If that growth rate was maintained, how long would it take for your company's EPS to double?

3. Your grandfather urged you to begin a habit of saving money early in your life. He suggested that you put $5 a day into an envelope. If you follow his advice, at the end of the year you will have $1,825 (365 $5). Your grandfather further suggested that you take that money at the end of the year and invest it in an online brokerage mutual fund account that has an annual expected return of 9%. Today you are 18 years old. If you start following your grandfather's advice today, and continue saving in this way the rest of your life, how much do you expect to have in the brokerage account when you are 65 years old?

4. Assume that you plan to buy a condo 5 years from now, and you estimate that you can save $3,500 per year. You plan to deposit the money in a bank that pays 4% interest, and you will make the first deposit at the end of the year. How much will you have after 5 years? How will your answer change if the interest rate is increased to 6% or lowered to 3%?

5. You just won the Florida lottery. To receive your winnings, you must select one of the two following choices: You can receive $1,000,000 a year at the end of each of the next 30 years; OR You can receive a one-time payment of $15,000,000 today. Assume that the current interest rate is 5%. Which option is most valuable?

6. You just received your first credit card and decided to purchase a new Apple iPad. You charged the iPad's $500 purchase price on your new credit card. Assume that the nominal interest rate on the credit card is 24% and that interest is compounded monthly. The minimum payment on the credit card is only $10 a month. If you pay the minimum and make no other charges, how long will it take you to fully pay off the credit card?

7. Suppose you borrowed $30,000 on a student loan at a rate of 7% and must repay it in three equal installments at the end of each of the next 3 years. How large would your payments be, how much of the first payment would represent interest, how much would be principal, and what would your ending balance be after the first year?

8. Find the interest rate earned on the following: You borrow $9,000 and promise to make payments of $2,684.80 at the end of each year for 5 years.

9. What is the present value of a $100 perpetuity if the interest rate is 8%? If interest rates doubled to 16%, what would its present value be?

10. You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan will have a 15% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? For 60 months?

Chapter 5 1. At the beginning of your freshman year, your favorite aunt and uncle deposit $10,000 into a four-year bank certificate of deposit (CD) that pays 4% annual interest. You will receive the money in the account (including the accumulated interest) if you graduate with honors in four years. How much will there be in the account after four years? 2. Your company's 2013 earnings per share were $1.62, and its growth rate during the prior 10 years was 8.75% per year. If that growth rate was maintained, how long would it take for your company's EPS to double? 3. Your grandfather urged you to begin a habit of saving money early in your life. He suggested that you put $5 a day into an envelope. If you follow his advice, at the end of the year you will have $1,825 (365 $5). Your grandfather further suggested that you take that money at the end of the year and invest it in an online brokerage mutual fund account that has an annual expected return of 9%. Today you are 18 years old. If you start following your grandfather's advice today, and continue saving in this way the rest of your life, how much do you expect to have in the brokerage account when you are 65 years old? 4. Assume that you plan to buy a condo 5 years from now, and you estimate that you can save $3,500 per year. You plan to deposit the money in a bank that pays 4% interest, and you will make the first deposit at the end of the year. How much will you have after 5 years? How will your answer change if the interest rate is increased to 6% or lowered to 3%? 5. You just won the Florida lottery. To receive your winnings, you must select one of the two following choices: You can receive $1,000,000 a year at the end of each of the next 30 years; OR You can receive a one-time payment of $15,000,000 today. Assume that the current interest rate is 5%. Which option is most valuable? 6. You just received your first credit card and decided to purchase a new Apple iPad. You charged the iPad's $500 purchase price on your new credit card. Assume that the nominal interest rate on the credit card is 24% and that interest is compounded monthly. The minimum payment on the credit card is only $10 a month. If you pay the minimum and make no other charges, how long will it take you to fully pay off the credit card? 7. Suppose you borrowed $30,000 on a student loan at a rate of 7% and must repay it in three equal installments at the end of each of the next 3 years. How large would your payments be, how much of the first payment would represent interest, how much would be principal, and what would your ending balance be after the first year? 8. Find the interest rate earned on the following: You borrow $9,000 and promise to make payments of $2,684.80 at the end of each year for 5 years. 9. What is the present value of a $100 perpetuity if the interest rate is 8%? If interest rates doubled to 16%, what would its present value be? 10. You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan will have a 15% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? For 60 months