Lecture 3~4 Exercise Problems and Questions. 1. Calculating Annuity Present Values. An investment offers $8,500 per year for 15 years, with the first payment occurring 1 year from now. If the required return is 9 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever? 2. Calculating Annuity Cash Flows. If you put up $25,000 today in exchange for a 7. 9 percent, 12year annuity, what will the annual cash flow be? 3. Calculating Perpetuity Values.
Dawa Financial is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever.
If the required rate of return on this investment is 7 percent, how much will you pay for the policy? 4. Calculate EAR. First National Bank charges 10. 1 percent compounded monthly on its business loans. First United Bank charges 10. 3 percent compounded seminally. As a potential borrower, which bank would you go to for a new loan? 5. Calculating APR. Magnus Credit Corp. wants to earn an effective annual return on its consumer loans of 16 percent per year.
The bank uses weekly compounded on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an uninformed borrower. 6. Calculating Loan Payments. You want to buy a new sports coupe for $73,800, and the finance office at the dealership has quoted you a 6. 1 percent APR loan for 60 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan? 7. Discounted Cash Flow Analysis. If the appropriate discount rate for the following cash flows is 8. percent, what is the present value of the cash flows? 1 Year 1 2 3 4 Cash Flow $1,200 1,100 800 400 8. Calculating Annuity Due. You want to buy a new sports car from Muscle Motors for $43,000. The contract is in the form of 1 60-month annuity due at a 6 percent APR. What will your monthly payment be? 9. Calculating Present Value. A 5-year annuity of 10 $7,800 semiannual payments will begin 9 years from now, with the first payment coming 9. 5 years from now. If the discount rate is 9 percent compounded semiannually, what is the value of this annuity five years from now? 2
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