Question 1: You want to buy a house. You have $20,000 saved. Mortgage rates are low 6% with monthly compounding for a 30 year mortgage. Your annual salary (1st job out of college) is $36,000. The bank caps your mortgage payment at 28% of your monthly income (over that and theyre worried about your ability to sustain the mortgage).

a. How much will the bank lend you?

b. Closing costs are estimated at 4% of the loan value. How much can you offer for a house that you like?

Question 2: Whats my payment going to be? You take out $20,000 for a new bass fishing boat. You can borrow at 8% per year with monthly compounding for a four year loan. What is your monthly payment?

Question 3: APR and EAR

a. Which savings account should you choose? 5.25% with daily compounding or 5.30% with semiannual compounding?

b. What is the APR if you can earn 1% per month on $1 invested today?

c. What are you really earning in (b)?