Reference no: EM13389044
1.You invested $2,800 in a mutual fund five years ago. The return on your mutual fund has been 7.4% per year. How much is in the fund now, at the end of five years?
2. A real estate developer purchased a parcel of land in March 2011 for $520,000. Today, three years later, she sold the property for $650,950. What was the rate of return per year?
3. Two years ago, I placed $10,000 in a risky hedge fund investment. In its first year, the value of my investment declined by -11.2%. In the second year, it earned a positive return of 4.4%. What was the annualized compounded rate of return over the two-year period?
4. I have 15 annual payments left on my farm loan. Each payment is $2800, and the next payment is due one year from today. If the quoted interest rate is 7% compounded annually, what is the balance on my loan?
5. That shiny, black Mustang GT can be yours for just $43,500. The value of your trade-in is $10,500, and your trade-in will be your down payment. The remaining balance can be financed with a four-year car loan with an Annual Percentage Rate (APR) of 4.2%, compounded monthly.What will be the amount of your monthly payment ?I have $10,000 which I am going to invest in a 3-year Certificate of Deposit (CD) with a quoted rate of 3.0%. Use this information to answer questions 6 and 7.
6. If the interest rate is compounded monthly:
a. What will this CD be worth when it matures?
b. What is the effective annual rate?
7. If the interest rate is compounded daily
a. What will this CD be worth when it matures?
b. What is the effective annual rate?
8. Jason and Heather are saving money for their son’s college education. If they make equal annual contributions, how much money will they need to deposit at the end of each of the next 12 years in order to have $106,000 (at t=12) if their account earns a constant return of 5% APR, compounded quarterly?
10. I will be joining a new health club and they have given me the choice of paying $800 today for a two-year membership or paying $40 per month for two years with the payments at the beginning of each month. If I choose the 24 monthly payments, the first payment is due today (at Time Zero). a. Calculate the monthly effective interest rate on the 24-payment option. b. Calculate the Effective Annual Rate (EAR) on the 24-payment option.
11. One of the credit card offers I received this week has an APR of 17.99% compounded daily (365 days in a year). Assume I borrow $5,000 today on the credit card and begin to incur finance charges. Take the percentage rate to 4 or more decimal places (or the decimal rate to 6 or more decimal places) when solving the following two problems.
a. At the end of the year, how much will I owe if I make no payments? Assume 365 days in a year, and assume there are no minimum monthly payments. Just compute the amount that will be owed at the end of the year.
b. What is the effective annual rate on this credit card?
12. In planning for their retirement in Arizona, your parents deposited $8,100 at the end of each year for the last 20 years into a mutual fund. The fund earned an annual return of 4.8% APR compounded monthly. Now, at the end of the 20-year period, your parents have transferred their money into an annuity account that will earn 3.6% APR compounded monthly. They are to withdraw an equal amount at the end of every month for the next 20 years. After the 20 years of monthly withdrawals, the account balance will be depleted. How much will they be withdrawing each month?
13. A donor established a scholarship that will pay $3,500 per year to a Kelley student. The scholarship will be awarded for the first time in March of 2016 (i.e., the first payment occurs two years from now). The donor decides that the scholarship should be provided in perpetuity. The BA Foundation manages investments like this for the Business School. The Foundation anticipates earning an APR of 5.5% per year on the invested funds. What is the amount of the donation that must be given to the IU Foundation today to endow this scholarship?
14. A financial manager borrows $17,000 to fund an increase in inventory. The loan is a oneyear, four-payment (i.e., quarterly payments) amortized loan with the first payment due three months from today (quarterly compounding). The EAR on the loan is 8.42%. Immediately after the second payment, the manager finds that the firm’s cash balance is higher than expected, and he decides to pay off the remaining balance of the loan. Assuming there is no penalty for early payment, what is the payoff on the loan?
15. Dow Chemical Company has bonds outstanding which are priced at $1,237.20. These bonds carry a coupon rate of 8.0%, make semiannual payments, and mature in 11 years. Assuming the par value is $1,000, what is the yield to maturity on these bonds?
16. What is the market value of a zero-coupon bond with a $1,000 face value and 11 years to maturity if the YTM on the bond is 8.0% ?
17. A professional sports team in an effort to solve a short-term cashflow problem has offered a player a guaranteed contract of $10 million dollars a year for the next season with guaranteed payments growing at 7% per year for the next 25 years. The player believes the discount rate for such payments is 13%. What is the value today of the payments contemplated in this contract?
18. Consider 3 bonds with maturities of 4, 10, and 20 years. All three bonds have a coupon rate of 6%, face values of $1,000, and make semiannual coupon payments. Now, answer the following questions:
a. What would be the market price of each bond if their YTM was 4%?
b. What would be the market price of each bond if their YTM was 8%?
c. What conclusions can you make regarding the relation between time to maturity and the sensitivity of bond prices to changes in interest rates?
19. You need a quick $600 to pay this month’s cell phone bill. An Indianapolis “payday” loan company will lend you that amount for 20 days, charging you a fee of “only” $55. The fee will be due on the day you pay off the loan. Recognizing that the fee is in reality the interest payment, please answer the following two questions. Assume 365 days in one year. a. What is the Annual Percentage Rate (APR) on this loan if you assume daily compounding?
b. What is the true effective annual rate (EAR) on this loan?
21. You have decided to buy a house for $560,000. You have saved enough money to make a 20% down payment, but you will need to borrow the remainder. You arrange for a 15-year mortgage (monthly payments) with a local bank at a stated rate of 6.0% APR.
a. What will be your monthly payment?
b. Construct the amortization table for the first 18 months of payments
c. What will be the outstanding balance or remaining principal after 18 monthly payments? In other words, if you decided to pay off the loan after 18 months, how much would you owe?