Please note: all the questions are essay-type questions and you should attempt and answer each question in Excel.

3. Your lovely wife has decided to buy you a vacuum cleaner for your birthday (she always supports you in your hobbies . . .). She called your best friend, a manager of a vacuum cleaner store, and he has suggested one of two payment plans: She can either pay $100 now or make 12 monthly pay- ments of $10 each, starting from today. What are the monthly IRR and the EAIR of the payment- over-time plan?

4. Your local bank has offered you a mortgage of $100,000. There are no points, no origination fees, and no extra initial costs (meaning you get the full $100,000). The mortgage is to be paid back over 10 years in annual payments, and the bank charges 12% annual interest. a. Calculate the monthly mortgage payments b. What is the mortgage EAIR?

5. Your local bank has offered you a 20-year, $100,000 mortgage. The bank is charging 1.5 points and processing costs of $750; both points and processing costs are deducted from the mortgage when it is given. Payments on the mortgage are annual and are based on a 10% interest rate on the full amount of the mortgage (that is, $100,000). a. Calculate the annual mortgage payment b. Calculate the EAIR c. Computeanamortizationtablethatshowstheamountofinterestyoucanreportfortaxeseach year.

6. Your local bank has offered you a 10-year, $100,000 mortgage with monthly payments. The bank is charging 1.5 points and processing costs of $750; both points and processing costs are deducted from the mortgage when it is given. Monthly payments on the mortgage are based on the 12% annual interest rate on the full amount of the mortgage (that is, $100,000). a. Calculate the monthly payment on the mortgage, show the amortization table, and compute the EAIR. b. Will the EAIR of the mortgage change if the loan period is 6 years? c. Computethetotalinterestpaidineachoftheyearsofthemortgage.Youcanbaseyouranswer on the amortization table or investigate the Excel function Cumipmt.

10. Youre considering buying an asset that has a 3-year life and costs $2,000. As an alternative to buying the asset, you can lease it for $600 per year (four annual payments, the first due today). Your bank is willing to lend you money for 15%. a. Should you lease or purchase the asset? b. What is the largest lease payment you would be willing to make?

11. Youre considering leasing or purchasing an asset with the following cash flows. a. Calculatethepresentvalueoftheleaseversusthepurchase.Whichispreferable? b. What is the largest annual lease payment you would be willing to pay?

18. Assumingthattheinterestrateis5%, compounded semiannually, which of the following is more valuable?

a. $5,000today.

b. $10,000 at the end of 5years.

c. $9,000 at the end of 4years.

d. $450 at the end of each year (in perpetuity) commencing in 1 year.

20. Michael Smith was in trouble: He was unemployed and living on his monthly disability pay of $1,200. His credit card debts of $19,000 were threatening to overwhelm this puny income. Every month in which he delayed paying the credit card debt cost him 1.5% on the remaining balance. His only asset was his house, on which he had a $67,000 mortgage.

Then Michael got a phone call from Uranus Financial Corporation: The company offered to refinance Michaels mortgage. The Uranus representative explained to Michael that, with the rise in real-estate values, Michaels house could now be remortgaged for $90,000. This amount would allow Michael to repay his credit card debts and even leave him with some money. Here are some additional facts:

The new mortgage would be for 25 years and would have an annual interest rate of 9.23%. The mortgage would be repayable in equal monthly payments over this term, at a monthly interest rate of 9.23% / 12 = 0.76917%. The fees on the mortgage are $8,000.

There are no penalties involved in repaying the $67,000 existing mortgage. Answer the following questions: a. What will Michaels monthly payments be on the new mortgage?

b. After repaying his credit card debts, how much money will Michael have left?

c. What is the effective annual interest rate (EAIR) on the Uranus mortgage?

22.WindyRoad is an investment company that has two mutual funds. The WindyRoad Dull Fund invests in boring corporate bonds and its Lively Fund invests in high-risk, high- return companies. The returns for the two funds in the 5-year period 20012005 are given below.

a. Suppose you had invested $100 in each of the two funds at the beginning of 2001.How much would you have at the end of 2005?

b. What was the EAIR paid by each of the funds over the 5-year period 20012005?

c. Is there a conclusion you can draw from this example?