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4 points each. Show all work. No Blanks. Full credit for correct answers and work shown. credit for incorrect answers and work shown. credit for correct answers and no work shown. No creditfor blanks or unanswered questions. Answers should be in BLUE ink. Use the chatroom for questions (up to the day prior of the Take home, no last minute scramble)! Chapter 5 Hillsbor o bank First bank South trust Bank Free Free $2.50 each Free $2. 50 each Sun Coast Bank Free $3.50 each ATM Charges Home bank: Using Other bank Atm: $ 4each Checking: minimum deposit $100 $50 $50 $200 Minimum balance $50 $50 $100 $50 Monthly fees $20 $15 $5 $10 Check-writing $1.50 $1.50 $2.50 charges each each each $2 each $5.00 will be charged for not maintaining the minimum balance. 1) Using the chart above. You want to open a checking account with a $100 deposit. You believe that that you will write 10 checks per month and use other bank's ATMs 3 times a month. You will be able to maintain a minimum balance of $25 per month. Which bank should you choose? Show work. Answer Checking on the Bank Account is a $100 deposit all the banks qualify HillsBoro Bank First Bank South Trust Bank $50.0 Sun Coast Bank South Trust Bank $25.0 Sun Coast Bank Minimum $100 $50.0 $200 Balance Deposit The cheapest bank to hold account with is South trust Bank and First Bank each holding $50 Writing 10 checks per month charges are HillsBoro Bank First Bank Charges of $15.0 $15.0 Check Writing The cheapest bank is HillsBoro and First Bank $20 The ATM charges considering 3 times per month then cost is: HillsBoro Bank First Bank ATM charges $4.5 $4.5 The cheapest bank cost is HillsBoro bank and First Bank South Trust Bank $7.5 Sun Coast Bank $6 Minimum bank Balance HillsBoro Bank First Bank South Trust Sun Coast Bank Bank Bank Balance $50.0 $50.0 $100.0 $50.0 Based on this analysis South Trust bank is the most expensive bank in terms of the charges and cost followed by Sun Coast Bank followed by Hillsboro and First Bank. The two banks first and Hills Boro tie in terms of cost apart from First bank and Hillsboro bank but. However, first bank is the cheapest to choose and maintain because of the Minimum balance. 2) You have an account at Bank A. Your last balance statement shows an ending balance of $150. This month you deposit $850 in your account and withdrew $250. The you write 6 checks, two of which clears. The two checks that have cleared totals $780. The three remaining checks total $200. You pay a $7 fee to your bank that month. What is the adjusted bank balance (accounting for the unclear checks as well)? Show work. Bank Account Dr Balance B/f Deposit Un cleared Checks Total $1,200 Bank Balance $150 $850 $200 Withdrawal Cleared checks Bank Charges Total Cr $250 $780 $7 $1,030 $170 3) You have $2500 to invest in a Certificate of Deposit. The local bank offers 3% for a 12 month FDIC insured CD. A nonfinancial institution offers 5% on a 12 month CD. What is the risk premium (in percentage) and what does it mean? Show work. 0.03 P1 2 $2,5001 12 20*12 0.05 P1 2 $2,5001 12 20*12 $2,575 $2,625 Beta () 0.000 Risk Free Return (rf ) 0.000% Market Return (rm ) 0.000% = 0 Chapter 6 4) You are depositing $1500 in an 3 month CD that pays 4% interest. How much interest will you accrue if you hold the CD until maturity? Show work. 1,514.78 3*12 0.04 P12 $1,5001 3 After 3 months the amount will be $1,515 Principal = $1,500 In 3 years, you will have $58,963.25 5) You have invested $5,000 in a 60 month CD that pays 4.25%. How much interest will you receive at maturity? Show Work. 6,156.73 in the next five years. 60 0.0425 P60 $5,0001 12 6) You have $15,000 excess cash to invest. A $14,000 T-bill can be purchased (maturing to value at $18,000), or three $4200 CDs can be purchased with a guaranteed 8% after 12 months. Which will give a better return (in percentages)? Show work. 60 0.08 P12 $4,2001 $4,536 12 The CD will result in $4,536 each and they are three meaning that the sum will be 13,608. Therefore, investing in Treasury Bill is more profitable. 7) You purchase a $20,000 T-bill for $10,000. A few months later you sold the T-bill for $18,000. What was the return on the t-bill? Show work. Purchase value = $10,000 Market value = $20,000 Difference = $10,000 Selling Value = $18,000 Profit on sale = $8,000 Chapter 7ASSESSING AND SECURING YOUR CREDIT 8) What is the time limit and liability, if you are a victim of: a) banking fraud? Acting fast as possible though there is no time limit of reporting the fraud. Many companies offer 24 hours for such kind of services. b) Credit fraud? Under the federal laws, the credit card unlawful usage liability of an tops up to $50. However if the loss is reported early, before using then one is not responsible for any unauthorized usage. 9) How is each interest rate, which you and other borrowers receive from a lender or credit company, determined by the creditors? The creditors consider: The cost of funding incurred in fund raising The cost of servicing and operating the loan Bank compensation as a risk premium The profit margin provided by the loan 10) Explain the advantage and the pitfalls of balance transfers (0% APR offers for a limited time)? What do you need to watch out for? Low interest rates Very convenient Low amount of fees A perfect strategy for reducing debts Cons The interest rate is high Expensive balance transfers Affects the credit scores Risk of more debts Chapter 8 11)A is offered a credit card (CARD A) that has an APR of 12.99%. B is offered a card (CARD B) that has 10.99% but charges $79 annually. They both plan to carry a balance forward of about $120 each month. Which person is offered a better card? Show work. A = P(1 + rt) $79(1=10.99) Card A because it is less expensive First, converte the R percent to r into a decimal r = R/100 = 16.99%/100 = 0.1699 per year, substitute the time into years to make it simpler, 1 months 12 months/year = 0.08 years, then, solve the equation A = 3500(1 + (0.1699 0.08)) = 3547.572 A = $ 3,547.57 that is the accrued total amount 12) Your credit cards closed on the 15th of every month, your payment are due on the 1st. You have an APR of 16.99%. a) If you purchases a TV for $3500 on October 20th, how many interest free days will you have left? 10 days b) When will you have to pay for the tv in full in order to avoid finance charges? The amount is $3,500 c) If you can pay only $250 per month, how long would it take for you to pay it off and how much interest would you end up paying for the TV? A = P(1 + rt) 3,500=250(1+rt)x =3,500/250 =15 months at interest of 16.99% 13) You currently have a credit card that charges 16.99% interest. You usually carry a balance of $200. You receive an offer for a new credit card with a teaser rate of 8.99% for the first 6 month...after that the rate goes up t0 22.99%. a) What is the total annual interest on the current credit card? APR = 16.99% The total charges on finance is $46.86 The total payment is 4246.9 The paymennnt per onth is $8.23 b) What will be the interest in the first year after you switch? The total interest is therefore $46.86 C) Should you switch? why? No it will be much more expensive 14) Josh have a credit card that charges 18.99% on outstanding balances and 25% on cash advances. The closing date on the credit card is the first of each month. Last month he left a balance of $800 on his credit card. This month he took out a cash advance of $650 and made $1600 in purchases. He made a payment of $1800. What will the total of his new balance be on his next credit card statement, taking into account finance charges? The total Finance charges is $84.66 The financed amount is $800 The total payment is $884.66 The total monthly payment $73.72 Chapter 9 15) Cersei Lannister needs to borrow $20,000 for the next year. Bank North will give her the loan at 13.5%. Bank South will give her the loan at 10% with a $250 loan origination fee. Bank East will give her the loan at 16% with no fees. Bank West will give her a loan at 9% but charges a $500 loan origination fee. The loan is for 1 year. A) Determine the total interest and fees she will be charges in each case. A = P(1 + rt) A=20,000(1+13.5%)1 A = 20,000(1.135)1 22,700 A=20,000(1+16.0%)1 A = 20,000(1.60)1 32,000 B) Which loan should she chose? The best loan to choose is the loan from Bank North 16) Little Finger has just borrowed $5,000 on a four year loan at 8% simple interest. Complete the Amortization table below for the first 5 month of the loan. Payment Number Beginning Balance Payment Applied Applied amount to to New Balance 1 $5,000 2 A 3 4,822 c 4 4,732.22 5 4,641.77 Payment Number 1 2 3 4 5 $122 $122 $122 $122 Beginning Payment Balance amount $5,000 $122 4,786 $122 4,822 $122 4,732.22 $122 4,641.77 $122 interest Principal $33.33 $88.67 $4,911.33 32.74 B 4,822.07 d 89.85 4,732.22 e 90.45 F 30.95 G H Applied to interest $33.33 32.74 32.64 63.46 30.95 Applied to Principal $88.67 87.82 89.85 90.45 86.84 New Balance $4,911.33 4,822.07 4,732.22 4,641.77 4554.94H 17) Determine the cost of a Payday loan. Homer Simpson had a rough few months. He fell behind on his mortgage and is living paycheck to paycheck. He anticipates another mortgage payment of $1500 coming up very soon at the beginning of April and does not have the liquidity to pay it before his next paycheck on April 7th. He tries a payday loan that is run by Burns Corp on April 1st. The payday loan charges him a fee of $100 for his $1500 advance on his pay. He pays off his $1500 mortgage on April 2th with the payday loan. He gets paid $1500 on April 7th, but another bill comes up! Bart broke his arm skate boarding and the hospital bill of $1500 is due April 9th. Homer must now delay repayment to the Burns Corp. for the payday loan. They charge him another $100 to delay repayment another pay period (2 weeks). He pays off Bart's hospital bill with his next paycheck (April 21st), but now his monthly taxes, credit cards and utilities of $1500 are due (April 23rd). He defers the payday loan for another pay period (to May 5th). They charge him another $100 to delay repayment for another 2 weeks. He gets paid and pays his credit card and utility bills, but then Marge has an accident with the family car, and they need to have it fixed! He defers repayment to Burns Corp. for payday loan again. They charge him another $100 to delay repayment. He finally gets his tax return check of $2000 and repays the payday loan. a) How much money does he pay to Burns Corp. for the Payday loans? Payday If you borrow $1,500 for 2 weeks: loan (fee) April 1st loan will cost $1,500 Hospital Bill $1,500 Delay $100 th May 5 Delay $100 Delay $100 The amount that he shall have to pay to Burns Corp for the loans is $1,800 b) How much interest would he have paid if he used his credit card with a 21.99% APR instead of a payday loan. He would have paid total interest of 308.89 I=PRT =5,000*0.07*3 I=1050 Total = 6050 18) You are borrowing $5,000 on a 3 year, 7% add-on interest loan. What will your payments be? Purchase value = $45,000 19) Ned Flanders wants to purchase a new car for $45,000. He has no savings, so he needs to finance the entire purchase amount. With no down payment, the interest rate on the loan is 7% and the maturity of the loan is 6 years. His monthly payments will be $903.33. He earns $650.00 a month. He has a credit card limit of $10,000 and an interest rate of 25%. If he uses all of his monthly earnings to make the monthly payments on the car: a) how much will he add each month to his credit card balance if he uses it to finance the remainder of the car? Monthly payments of $903.33 in a span of six years at a rate of 7% shall resul to a sum of 78,897.04 b) What will the finance charges are on his credit card for the first 4 months that finance charges apply? (Assuming he makes no payments towards his credit card). =225.33 20) You graduated from college a year ago and forgot to pay one of your student loans. Now it is in default and you are being contacted by a collections agency. It is a private loan. What do you do? How do you fix it? I shall report to the nearest reporting agency Chapter 10 21) HOME PRICE OFFER. Olivia is ready to make an offer on a 2200 sq. ft. home that is priced at $225,000. She investigates other homes on Lots of similar sizes, within the same neighborhood. A 2,250 square foot home that sold for $250,000. A 1850 square foot home that sold for $230,000. A 1800 square foot house that sold for $200,000. What should she offer on the home? The right amount should she should offer $230,000 22) CLOSING COST. How much would you have to pay at closing if you took out a mortgage loan for $450,000 and did not put a down payment of 20%, but instead put down 10%...which means that you will need to pay an origination fee of 1% and PMI of 1.0% on the total loan amount. Other fees include $150 loan application fee and $450 appraisal fee, $250 for title search and insurance. (How much will you need at closing?) 1) A down payment of 10% at $450,000 is 45,000 An origination fee of 1.0% is $4,500 The required amount at closing shall be $250 2) TOTAL INTEREST PAID. Veronica is considering purchasing a home that requires $300,000 mortgage. The payment on the 30 year mortgage for this amount is $1897.34 per month, the payment for a 15 year maturity is $2200.57 per month. A) What is the total amount she would pay for the 30 year mortgage? House Price $300,000.00 Loan Amount $240,000.00 Down Payment $60,000.00 Total of 360 Mortgage Payments $389,906.35 Total Interest $149,906.35 Mortgage Payoff Date Oct. 2046 B) What is the total amount that she would pay for the 15 year mortgage? House Price $300,000.00 Loan Amount $240,000.00 Down Payment Total of 180 Mortgage Payments Total Interest Mortgage Payoff Date $60,000.00 $309,678.54 $69,678.54 Oct. 2031 C) What is the difference in the total interest paid between the two different maturities? Difference = $149,906.35 - $69,678.54 = 80227.81 3) TAX SAVINGS. If the rent on an apartment is $1500 per month, which is equal to a mortgage payment on a house, how much additional tax savings will you realize if $800 of the monthly mortgage payment is interest and your tax bracket is 28 percent? =196 4) REFINANCNG. If a current mortgage payment of $1700 per month can be reduced to $1250 per month by refinancing, how many months would you need to remain in the house to recoup refinancing charges of $4,000? (Round up to the nearest month.) $1,700 - $1250 = $450 =4,000/450 = 9 months