Question:1.

Investment X offers to pay you $6,100 per year for nine years, whereas Investment Y offers to pay you $8,800 per year for five years.

Calculate the present value for Investments X and Y if the discount rate is 5 percent.(Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Present value

Investment X

$

Investment Y

$

Calculate the present value for Investments X and Y if the discount rate is 15 percent.(Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Present value

Investment X

$

Investment Y

$

2.

An investment offers $5,200 per year for 20 years, with the first payment occurring one year from now.

If the required return is 7 percent, what is the value of the investment today?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

What would the value today be if the payments occurred for 45 years?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

What would the value today be if the payments occurred for 70 years?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

What would the value today be if the payments occurred forever?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

3.

Suppose an investment offers to double your money in 18 months (don't believe it). What rate of return per quarter are you being offered?(Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Rate of return

%

4.

Audrey Sanborn has just arranged to purchase a $480,000 vacation home in the Bahamas with a 30 percent down payment. The mortgage has a 5.4 percent APR, compounded monthly, and calls for equal monthly payments over the next 30 years. Her first payment will be due one month from now. However, the mortgage has an eight-year balloon payment, meaning that the balance of the loan must be paid off at the end of Year 8. There were no other transaction costs or finance charges.

How much will Audrey's balloon payment be in eight years?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Balloon payment

$

5.

Southern California Publishing Company is trying to decide whether to revise its popular textbook,Financial PsychoanalysisMade Simple. The company has estimated that the revision will cost $80,000. Cash flows from increased sales will be $21,800 the first year. These cash flows will increase by 3 percent per year. The book will go out of print four years from now. Assume that the initial cost is paid now and revenues are received at the end of each year.

If the company requires a return of 8 percent for such an investment, calculate the present value of the cash inflows of the project.(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

6.

You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage for 80 percent of the $3,200,000 purchase price. The monthly payment on this loan will be $17,300.

What is the APR on this loan?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Annual percentage rate

%

What is the EAR on this loan?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Effective annual rate

%

7.

You are looking at a one-year loan of $18,500. The interest rate is quoted as 7.3 percent plus four points. Apointon a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. The interest rate quotation in this example requires the borrower to pay four points to the lender up front and repay the loan later with 7.3 percent interest.

What rate would you actually be paying here?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Interest rate

%

What is the EAR for a one-year loan with a quoted interest rate of 10.3 percent plus two points?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

EAR

%

Is your answer affected by the loan amount?

Yes

No

8.

An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company:

First birthday

$

940

Second birthday

$

940

Third birthday

$

1,040

Fourth birthday

$

850

Fifth birthday

$

1,140

Sixth birthday

$

950

After the child's sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $440,000. If the relevant interest rate is 15 percent for the first six years and 7 percent for all subsequent years, what would the value of the deposits be when the policy matures?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value

$

1.

Investment X offers to pay you $6,100 per year for nine years, whereas Investment Y offers to pay you $8,800 per year for five years.

Calculate the present value for Investments X and Y if the discount rate is 5 percent.(Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Present value

Investment X

$

Investment Y

$

Calculate the present value for Investments X and Y if the discount rate is 15 percent.(Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Present value

Investment X

$

Investment Y

$

2.

An investment offers $5,200 per year for 20 years, with the first payment occurring one year from now.

If the required return is 7 percent, what is the value of the investment today?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

What would the value today be if the payments occurred for 45 years?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

What would the value today be if the payments occurred for 70 years?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

What would the value today be if the payments occurred forever?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

3.

Suppose an investment offers to double your money in 18 months (don't believe it). What rate of return per quarter are you being offered?(Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Rate of return

%

4.

Audrey Sanborn has just arranged to purchase a $480,000 vacation home in the Bahamas with a 30 percent down payment. The mortgage has a 5.4 percent APR, compounded monthly, and calls for equal monthly payments over the next 30 years. Her first payment will be due one month from now. However, the mortgage has an eight-year balloon payment, meaning that the balance of the loan must be paid off at the end of Year 8. There were no other transaction costs or finance charges.

How much will Audrey's balloon payment be in eight years?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Balloon payment

$

5.

Southern California Publishing Company is trying to decide whether to revise its popular textbook,Financial PsychoanalysisMade Simple. The company has estimated that the revision will cost $80,000. Cash flows from increased sales will be $21,800 the first year. These cash flows will increase by 3 percent per year. The book will go out of print four years from now. Assume that the initial cost is paid now and revenues are received at the end of each year.

If the company requires a return of 8 percent for such an investment, calculate the present value of the cash inflows of the project.(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value

$

6.

You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage for 80 percent of the $3,200,000 purchase price. The monthly payment on this loan will be $17,300.

What is the APR on this loan?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Annual percentage rate

%

What is the EAR on this loan?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Effective annual rate

%

7.

You are looking at a one-year loan of $18,500. The interest rate is quoted as 7.3 percent plus four points. Apointon a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. The interest rate quotation in this example requires the borrower to pay four points to the lender up front and repay the loan later with 7.3 percent interest.

What rate would you actually be paying here?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Interest rate

%

What is the EAR for a one-year loan with a quoted interest rate of 10.3 percent plus two points?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

EAR

%

Is your answer affected by the loan amount?

Yes

No

8.

An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company:

First birthday

$

940

Second birthday

$

940

Third birthday

$

1,040

Fourth birthday

$

850

Fifth birthday

$

1,140

Sixth birthday

$

950

After the child's sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $440,000. If the relevant interest rate is 15 percent for the first six years and 7 percent for all subsequent years, what would the value of the deposits be when the policy matures?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)