Question 1

PRESENT VALUE AND LOAN ELIGIBILITY

You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan would have a 12% annual interest based on end-of- month payments. What is the most expensive car you could afford if you finance it for 48 months? For 60 months?

[4 marks]

Question 2

EFFECTIVE VERSUS NOMINAL INTEREST RATES

Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily.

A) Based on the Effective Interest Rate (EIR) which bank should you use?

B) Could your choice of banks be influenced by the fact you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest.

[4 marks]

Question 3

NOMINAL INTEREST RATE AND EXTENDING CREDIT

As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly. To carry receivables, you must borrow funds from your bank at a nominal 6%, monthly compounding. To offset your overhead, you want to charge your customers an EIR that is 2% more than the bank is charging you.

What annual interest rate should you change your customers? [2 marks]

Question 4

John has been shopping for a loan to finance the purchase of a car. He has found three possibilities that seem attractive and wishes to select the one with the lowest interest rate. The information available with respect to each of the three 5 000 loans is shown in the table below.

Loan	Principal	Annual payment	Term (year)
A	5 000	$1 352.81	5
B	5 000	$1 543.21	4
C	5 000	$2 010.45	3

1. Determine the interest associated with each of the loans
2. Which loan should John take?

[ 5 marks]

Question 5

FUTURE VALUE OF UNEVEN CASHFLOW

You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save $5000 at the end of the first year, and you anticipate that your annual savings will increase by 10 % annually thereafter. Your expected annual return is 7%. How much would you have for a down payment at the end of year 3?

[ 6 marks]

Question 6

AMORTIZATION SCHEDULE

A. Joan Williams borrowed $15 000 at 14% annual rate of interest to be repaid over three years. The loan is repaid over three equal end of year payments.

i.) Calculate the annual end of year payments

ii) Prepare a loan amortization schedule showing the interest and principal breakdown of each of

the three loan payments

B. What percentage of the payment represents interest and what percentage represents principal

for each of the 3 years? Why do these percentages change overtime?

[ 9 marks]

Question 7

RETIREMENT SAVINGS AND PLANNING

Sunrise Industries wishes to accumulate funds to provide a retirement annuity for its vice president of research, Jill Moran. Ms. Moran by contract will retire at the end of exactly 12 years. Upon retirement, she is entitled to receive an annual end-of-year payment of $42,000 for exactly 20 years. If she dies prior to the end of the 20-year period, the annual payments will pass to her heirs. During the 12-year "accumulation period" Sunrise wishes to fund the annuity by making equal annual end-of-year deposits into an account earning 9% interest. Once the 20-year "distribution period" begins, Sunrise plans to move the accumulated monies into an account earning a guaranteed 12% per year. At the end of the distribution period, the account balance will be zero. Note that the first deposit will be made at the end of year 1 and that the first distribution payment will be received at the end of year 13.

Required

1. How large a sum must Sunrise accumulate by the end of year 12 to provide the 20-year, $42,000 annuity?

2. How large must Sunrise's equal annual end-of-year deposits into the account be over the 12-year accumulation period to fund fully Ms. Moran's retirement annuity?

c. How much would Sunrise have to deposit annually during the accumulation period if it could

earn 10% rather than 9% during the accumulation period?

d. How much would Sunrise have to deposit annually during the accumulation period if

Ms. Morans retirement annuity were a perpetuity and all other terms were the same as

initially described? [ 10 marks]