Question #1

Izzy Parker is a very bright recent college graduate that has just finished a degree in health sciences. Her plan

has always been to become a doctor, however, she has decided to postpone medical school to pursue her

ultimate dream of becoming a famous actress. Izzy has decided to give herself 5 years to land a decent role

in a movie or television show and if after 5 years she is unsuccessful she made a promise to herself that she

would go to medical school. Additionally, as part of this promise, Izzy has made a pledge to herself that she

would save enough money such that she could pay for school.

Izzy estimates that it will cost $34,000 per year for 4 years (payable at the end of each year). Fortunately, her

parents are very supportive of her plan and have agreed to provider her some financial assistance. They had

been saving for the last 5 years, investing $5,400 per year, and they told Izzy should could have this money

for school. Current interest rates are 12%.

How much additional money will Izzy need to put aside herself annually for the next 5 years to pay for

medical school? How would your answer change if interest rates increased dramatically over this 5 year

period, explain your answer.

Question #2

James found an incredible deal on a beautiful sailboat, however it was a lot more than he anticipated

spending. The boat was $150,000, and he had total savings of $94,000, implying he would need to secure a

loan for the $56,000 balance.

James had recently started a new job and things were going quite well, and he was expecting an annual

bonus of between $10,000 - $12,000 at the end of the year. He was optimistic that he could maintain this

bonus level for the foreseeable future.

James' bank manager looked over his credit history and income information and suggested the best loan he

could extend James for $56,000 would be a 8-year loan at 10% with annual repayments. James took this

information home to crunch some number and decide if he could manage these terms.

a) Calculate the yearly payments James would have to make over the 8 years. Will James' expected

bonus be sufficient to cover the annual loan payments? (Round to the nearest dollar)

b) How much of his first loan payment would be applied to interest and principal? (use template

below)

c) How much of his second loan payment would be applied to interest and principal? (use template

below)

d) At the end of his second year, how much would have been paid in interest, and how much of the

loan would be outstanding?

e) Calculate how much interest James would be paying in total over the 8-year loan.