Reference no: EM133070006
1) You have applied for an $180,000 mortgage to buy your first house. The bank is offering you a 30-year loan at 4.25 percent interest.
a) What is the monthly payment on this loan?
b) If you continue to make this payment for 7 years, how much will you owe on this loan?
c) Suppose instead of the scheduled monthly payment calculated in (a) above, you make payments of $1,000 per month. How long will it take you to pay off the loan?
2) Consider an investment that will pay you $1,000 each year for five years. After that, the payment will grow by 3 percent per year indefinitely, so that the payment in year 6 will be $1,030, the payment in year 7 will be $1,060.90, and so forth.
a) If your required rate of return on this investment is 13 percent, what is the most you'd be willing to pay for it?
b) If the investment costs you $8,000 today, what is its net present value?
3) Rich is evaluating an investment that will provide the following returns at the end of each of the following years:
Years 1-3: Years 4-5: Years 6-10:
$14,000 $0 $20,000
Rich believes he should earn an annual return of 8 percent on this investment. How much should he be willing to pay for this investment?
4) Consider an investment that will pay you $3,000 per month for each of the next 3 years, and then $5,000 per month in the following 5 years.
a) If your required rate of return on this investment is 18 percent per year, what is the most you would be willing to pay for it?
NOTE: Your cash flow worksheet does NOT incorporate the P/Y setting. Thus, you must use periodic interest rates when calculating the NPV with irregular cash flows.
b) Suppose you can purchase this investment for $150,000. What is its net present value? Should you purchase this investment?
5) Jeremy would like to retire in 25 years. He would like his retirement income to be $250,000, and this figure should grow at the same rate as inflation, expected to be 2 percent annually. He expects to live 30 years after he retires, and plans to leave $3 million to WSU after he dies. Jeremy currently has $1,000,000 in his retirement fund. The fund is expected to earn 6 percent annually. Assuming that Jeremy increases his annual retirement savings by 2 percent per year (the inflation rate), how much must he save this year in order to have enough funds for his retirement goals?
HINTS: Both Jeremy's retirement income AND his annual retirement savings are growing annuities (each at the 2 percent inflation rate). Also, you may assume that all payments are made or received at the end of each year, so that they are ordinary growing annuities.
6) Suppose that the yield on 1-year Treasury securities is 2.25%, 2-year securities yield 2.10%, 3-year securities yield 2.05%, and 4-year securities yield 1.95%. There is no maturity risk premium.
a) Does this situation describe an upward sloping, downward sloping, or flat yield curve?
b) Based on the pure expectations theory of the yield curve, what do markets believe the yield on a 1-year Treasury security will be one year from now?
c) Based on the pure expectations theory of the yield curve, what do markets believe the yield on a 2-year Treasury security will be 2 years from now?
7) Can the nominal interest rate available to an investor be significantly negative? (Hint: consider the interest rate earned from saving cash "under the mattress.") Can the real interest rate be negative? Explain.