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Instruction: Answer all questions. Question 1 (a) You have borrowed $10,000 from a bank with the understanding that you will pay it off with a
Instruction: Answer all questions. Question 1 (a) You have borrowed $10,000 from a bank with the understanding that you will pay it off with a lump sum of $12,000 after 2 years. Find the annual rate of interest on this loan. (5 marks) (b) About how many years would it take for your investment to grow sevenfold if it were invested at 10 percent compounded semiannually? Assuming that you have $100 today. (5 marks) (c) You decide to put $12,000 in a money market fund that pays interest at the annual rate of 8.4%, compounded monthly. You plan to take the money out after one year and pay the income tax on the interest earned. You are in the 15% tax bracket. Find the total amount available to you after taxes. (5 marks) (d) Ferguson wished to choose the better of two equally costly cash flow streams: Annuity X and Annuity Y. X is an annuity due with a cash inflow of $9,000 for each of 6 years. Y is an ordinary annuity with a cash inflow of $10,000 for each of 6 years. Assume that Ferguson can earn 15% on his investments i) Which annuity will give a higher intrinsic value? Calculate. (5 marks) ii) Find the future value at the end of year 6 for both annuities. (5 marks) iii) Use your finding in part ii to indicate which annuity is more attractive. Why? (2 marks) Your father asks for your help in choosing a mortgage loan to finance a new house. Assume you have come across two financing options. Option A has an annual percentage rate of 7.55 percent but with interest compounded monthly. Option B has an annual percentage rate of 7.45 percent with interest compounded daily. Which option would you recommend to your father? Show all the workings to justify your answers. (5 marks) (e)
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