Microsoft Word Ps1 doc Mary is interested in driving a new 2016 Ford Taurus for three years Most dealers will give consumers two optionsfinancing or leasing The leasing deal usually requires a down payment of (a one time payment at the beginning) and a monthly payment for 36 months At the end of leasing period, Mary can simply return the car to the dealer Alternative she can purchase Taurus at $21,000 and keep the car forever Suppose the car is worth 65 of the purchase price at the end of the 36 month, and the current interest rate is 4 (APR on a monthly base) (a) Ifthereisnodownpayment,andMarywantstousetheleasingdeal,howmuchmonthlypaymentshouldthe dealer charge Mary (b) NowifthedealerisofferingapromotionalfinancingdealthatallowsMarytoborrowat1 99 interestrate (APR on a monthly base) for 36 months If Mary uses the financing deal to purchase her car, how much does she pay each month (c) IfthedealerisofferingMaryaleasingdealofamonthlypaymentof$250amonthfor36monthswithouta down payment, which options is better hint You cannot directly compare your answer from (b) to $250 since the life spans that you own the car are different To make it comparable, you need to assume that Mary will sell her car at the end of 36 month in the case of financing, and compute the present value of each option After graduating from UTD at age 25, John got his first job at Goldman Sachs with an annual salary of $60,000 a year and a one time signing bonus of $25,000 He bought a car using his signing bonus Goldman Sachs offers a 401K retirement investment plan that will match employees contribution up to 10 For example if John invests 1 in the 401K account, Goldman Sachs will put in another 1 into his account John is expecting an annual salary increase of 2 4 (APR on a monthly base) Suppose, the 401K investment plan will earn him an annual return of 7 2 (APR on a monthly base) (Assume the beginning of age 25 is month 0 and salary is paid at the end of each month, i e , beginning of age 65 is the last period) (a) WhatpercentageofsalaryshouldJohninvestinhis401Kaccountinorderforhimtohave$1 5millioninhis account when he retires in 40 years (b) Atthesamecontributionrate,ifheretiresin35yearsinstead,howmanypercentlessmoneywillJohnhave (c) Insteadofbuyinganicecar,hebroughtausedcarfor$10,000,andsavedtherestofsigningbonusinaseparate investment account for retirement that pays 8 4 annual interest (APR on a monthly base) If John wants to have $1 5 million total when he retires in 35 years, what percentage of salary should John invest in his 401K account In the setting of problem 4(a), John will transfer her money at the age of 65 (his retirement) from his 401K account (valued at $1 5 million) into a safe account which will earn an annual interest of 3 6 (APR on a monthly base) (a) Ifhewantstouseupallhismoneyattheageof85,howmuchcanhespendeachmonthafterretirement (b) WhatifJohndiesattheageof95anduseupallhismoney,howmuchcanhespendeachmonthafter retirement now (c) Suppose there is 70 change that John will live up to 85 and 30 he will live up to 95 If John wants to buy an annuity product from an investment bank, how much will he get each month (hint In an ideal case, suppose the investment bank does not charge a fee In this case, you can only get the expected payment ) What is the equivalent annuity factor (that is if you want to get $1 each month until you die, how much do you need now ) (d) IfJohnonlyspend$6000(i e 4 ofhisbalance)eachmonth,andhediesattheageof90,howmuchhecould pass to his children if he does not buy the annuity product 6 Using the example in lecture notes, create a similar repayment schedule for a $20,000 two year auto loan with monthly payments and an effective annual percentage rate (EAR) of 5 00 This exercise is most easily done using a spreadsheet program Some hints (1) In order to find each months interest rate, you need to first convert EAR to APR (2) The monthly payment amount is the key item to calculate, which can apply the annuity formula (3) The second key item is the interest amount every month, which is calculated using monthly interest on the loan balance at the beginning of the period (4) Try to replicate the example first, to make sure you've got things working By making fixed monthly payments on your loan, you are repaying the principle amount over the next 24 months This process of paying off a loan by making regular principal reductions is called amortizing the loan For your first and last monthly loan payment, what percentages of your payment go to paying your interest, and what is the pattern How much interest your will pay over the life of the loan

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Microsoft Word - Ps1.doc Mary is interested in driving a new 2016 Ford Taurus for three years. Most dealers will give consumers two optionsfinancing or

Microsoft Word - Ps1.doc

Mary is interested in driving a new 2016 Ford Taurus for three years. Most dealers will give consumers two optionsfinancing or leasing. The leasing deal usually requires a down payment of (a one-time payment at the beginning) and a monthly payment for 36 months. At the end of leasing period, Mary can simply return the car to the dealer. Alternative she can purchase Taurus at $21,000 and keep the car forever. Suppose the car is worth 65% of the purchase price at the end of the 36 month, and the current interest rate is 4% (APR on a monthly base).
1. (a) Ifthereisnodownpayment,andMarywantstousetheleasingdeal,howmuchmonthlypaymentshouldthe dealer charge Mary?
2. (b) NowifthedealerisofferingapromotionalfinancingdealthatallowsMarytoborrowat1.99%interestrate (APR on a monthly base) for 36 months. If Mary uses the financing deal to purchase her car, how much does she pay each month?
3. (c) IfthedealerisofferingMaryaleasingdealofamonthlypaymentof$250amonthfor36monthswithouta down payment, which options is better? [hint: You cannot directly compare your answer from (b) to $250 since the life spans that you own the car are different. To make it comparable, you need to assume that Mary will sell her car at the end of 36 month in the case of financing, and compute the present value of each option.]
After graduating from UTD at age 25, John got his first job at Goldman Sachs with an annual salary of $60,000 a year and a one-time signing bonus of $25,000. He bought a car using his signing bonus. Goldman Sachs offers a 401K retirement investment plan that will match employees contribution up to 10%. For example if John invests 1% in the 401K account, Goldman Sachs will put in another 1% into his account. John is expecting an annual salary increase of 2.4% (APR on a monthly base). Suppose, the 401K investment plan will earn him an annual return of 7.2% (APR on a monthly base). (Assume the beginning of age 25 is month 0 and salary is paid at the end of each month, i.e., beginning of age 65 is the last period)
1. (a) WhatpercentageofsalaryshouldJohninvestinhis401Kaccountinorderforhimtohave$1.5millioninhis account when he retires in 40 years?
2. (b) Atthesamecontributionrate,ifheretiresin35yearsinstead,howmanypercentlessmoneywillJohnhave?
3. (c) Insteadofbuyinganicecar,hebroughtausedcarfor$10,000,andsavedtherestofsigningbonusinaseparate investment account for retirement that pays 8.4% annual interest (APR on a monthly base). If John wants to have $1.5 million total when he retires in 35 years, what percentage of salary should John invest in his 401K account?
In the setting of problem 4(a), John will transfer her money at the age of 65 (his retirement) from his 401K account (valued at $1.5 million) into a safe account which will earn an annual interest of 3.6% (APR on a monthly base).
1. (a) Ifhewantstouseupallhismoneyattheageof85,howmuchcanhespendeachmonthafterretirement?
2. (b) WhatifJohndiesattheageof95anduseupallhismoney,howmuchcanhespendeachmonthafter retirement now?
3. (c) Suppose there is 70% change that John will live up to 85 and 30% he will live up to 95. If John wants to buy an annuity product from an investment bank, how much will he get each month? (hint: In an ideal case, suppose the investment bank does not charge a fee. In this case, you can only get the expected payment.) What is the equivalent annuity factor? (that is if you want to get $1 each month until you die, how much do you need now?)
4. (d) IfJohnonlyspend$6000(i.e.4%ofhisbalance)eachmonth,andhediesattheageof90,howmuchhecould pass to his children if he does not buy the annuity product?

6. Using the example in lecture notes, create a similar repayment schedule for a $20,000 two-year auto loan with monthly payments and an effective annual percentage rate (EAR) of 5.00%. This exercise is most easily done using a spreadsheet program. Some hints:

(1) In order to find each months interest rate, you need to first convert EAR to APR.
(2) The monthly payment amount is the key item to calculate, which can apply the annuity formula.
(3) The second key item is the interest amount every month, which is calculated using monthly interest on the loan balance at the beginning of the period.
(4) Try to replicate the example first, to make sure you've got things working. By making fixed monthly payments on your loan, you are repaying the principle amount over the next 24 months. This process of paying off a loan by making regular principal reductions is called amortizing the loan. For your first and last monthly loan payment, what percentages of your payment go to paying your interest, and what is the pattern? How much interest your will pay over the life of the loan?