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Finance Applications and Theory 3rd edition Marcia Cornett, Troy Adair - Solutions
What annual rate of return is implied on a $2,500 loan taken next year when $3,500 must be repaid in year 4?
Ten years ago, Hailey invested $2,000 and locked in a 9 percent annual interest rate for 30 years (end 20 years from now). Aidan can make a 20-year investment today and lock in a 10 percent interest rate. How much money should he invest now in order to have the same amount of money in
Ten years ago, Hailey invested $3,000 and locked in an 8 percent annual interest rate for 30 years (end 20 years from now). Aidan can make a 20-year investment today and lock in a 10 percent interest rate. How much money should he invest now in order to have the same amount of money in
You are scheduled to receive a $500 cash flow in one year, a $1,000 cash flow in two years, and pay an $800 payment in three years. If interest rates are 10 percent per year, what is the combined present value of these cash flows?
Oil prices have increased a great deal in the last decade. The table below shows the average oil price for each year since 1949. Many companies use oil products as a resource in their own business operations (like airline firms and manufacturers of plastic products). Managers of these firms will
Determine the interest rate earned on a $1,400 deposit when $1,800 is paid back in one year.
Determine the interest rate earned on a $2,300 deposit when $2,900 is paid back in one year.
What kind of returns might you expect in the stock market? One way to measure how the stock market has performed is to examine the rate of return of the S&P 500 Index. To see historical prices of the S&P 500 Index, go to Yahoo! Finance (finance.yahoo.com) and click on the “S&P 500”
People have had a fascination with gold for thousands of years. Archaeologists have discovered gold jewelry in Southern Iraq dating to 3000 BC and gold ornaments in Peru dating to 1200 BC. The ancient Egyptians were masters in the use of gold for jewelry, ornaments, and economic exchange. By 1000
How can you use the present value of an annuity concept to determine the price of a house you can afford?
Since perpetuity payments continue forever, how can a present value be computed? Why isn’t the present value infinite?
How can you use the concepts illustrated in computing the number of payments in an annuity to figure how to pay off a credit card balance? How does the magnitude of the payment impact the number of months?
People can become millionaires in their retirement years quite easily if they start saving early in employer 401(k) or 403(b) programs (or even if their employers don’t offer such programs). Demonstrate the growth of a $250 monthly contribution for 40 years earning 9 percent APR.
Use the idea of compound interest to explain why EAR is larger than APR.
The interest on your home mortgage is tax deductible. Why are the early years of the mortgage more helpful in reducing taxes than in the later years?
Compute the future value in year 9 of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 using a 10 percent interest rate.
Compute the future value in year 7 of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using an 8 percent interest rate.
What is the future value of a $900 annuity payment over five years if interest rates are 8 percent?
What is the future value of a $700 annuity payment over six years if interest rates are 10 percent?
Compute the present value of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 if interest rates are 10 percent.
Compute the present value of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using an 8 percent interest rate.
What is the present value of a $900 annuity payment over five years if interest rates are 8 percent?
What is the present value of a $700 annuity payment over six years if interest rates are 10 percent?
Given a 4 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,100, $1,200, $1,200, and $1,500.
Given a 5 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400.
Assume that you contribute $200 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $300 per month for another 30 years. Given a 7 percent interest rate, what is the value of your retirement plan after the 50 years?
Assume that you contribute $150 per month to a retirement plan for 15 years. Then you are able to increase the contribution to $350 per month for the next 25 years. Given an 8 percent interest rate, what is the value of your retirement plan after the 40 years?
Given a 6 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,500.
Given a 7 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400.
A small business owner visits her bank to ask for a loan. The owner states that she can repay a loan at $1,000 per month for the next three years and then $2,000 per month for two years after that. If the bank is charging customers 7.5 percent APR, how much would it be willing to lend
A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $1,500 per month for the next three years and then $500 per month for two years after that. If the bank is charging customers 8.5 percent APR, how much would it be willing to lend the
You are looking to buy a car. You can afford $450 in monthly payments for four years. In addition to the loan, you can make a $1,000 down payment. If interest rates are 5 percent APR, what price of car can you afford?
You are looking to buy a car. You can afford $650 in monthly payments for five years. In addition to the loan, you can make a $750 down payment. If interest rates are 8 percent APR, what price of car can you afford?
A perpetuity pays $100 per year and interest rates are 7.5 percent. How much would its value change if interest rates increased to 9 percent? Did the value increase or decrease?
A perpetuity pays $50 per year and interest rates are 9 percent. How much would its value change if interest rates decreased to 7.5 percent? Did the value increase or decrease?
If you start making $50 monthly contributions today and continue them for five years, what’s their future value if the compounding rate is 10 percent APR? What is the present value of this annuity?
If you start making $75 monthly contributions today and continue them for four years, what is their future value if the compounding rate is 12 percent APR? What is the present value of this annuity?
Payday loans are very short-term loans that charge very high interest rates. You can borrow $225 today and repay $300 in two weeks. What is the compounded annual rate implied by this 33.33 percent rate charged for only two weeks?
What is the interest rate of a 6-year, annual $5,000 annuity with present value of $20,000?
What annual interest rate would you need to earn if you wanted a $1,000 per month contribution to grow to $75,000 in six years?
What annual interest rate would you need to earn if you wanted a $600 per month contribution to grow to $45,000 in six years?
You wish to buy a $25,000 car. The dealer offers you a 4-year loan with a 9 percent APR. What are the monthly payments? How would the payment differ if you paid interest only? What would the consequences of such a decision be?
You wish to buy a $10,000 dining room set. The furniture store offers you a 3-year loan with an 11 percent APR. What are the monthly payments? How would the payment differ if you paid interest only? What would the consequences of such a decision be?
Joey realizes that he has charged too much on his credit card and has racked up $5,000 in debt. If he can pay $150 each month and the card charges 17 percent APR (compounded monthly), how long will it take him to pay off the debt?
Phoebe realizes that she has charged too much on her credit card and has racked up $6,000 in debt. If she can pay $200 each month and the card charges 18 percent APR (compounded monthly), how long will it take her to pay off the debt?
Given an 8 percent interest rate, compute the year 7 future value if deposits of $1,000 and $2,000 are made in years 1 and 3, respectively, and a withdrawal of $700 is made in year 4.
Given a 9 percent interest rate, compute the year 6 future value if deposits of $1,500 and $2,500 are made in years 2 and 3, respectively, and a withdrawal of $600 is made in year 5.
To borrow $2,000, you are offered an add-on interest loan at 10 percent with 12 monthly payments. First, compute the 12 equal payments and then compute the EAR of the loan:
To borrow $700, you are offered an add-on interest loan at 9 percent with 12 monthly payments. First, compute the 12 equal payments and then compute the EAR of the loan:
A car company is offering a choice of deals. You can receive $500 cash back on the purchase, or a 3 percent APR, 4-year loan. The price of the car is $15,000 and you could obtain a 4-year loan from your credit union, at 6 percent APR. Which deal is cheaper?
A car company is offering a choice of deals. You can receive $1,000 cash back on the purchase, or a 2 percent APR, 5-year loan. The price of the car is $20,000 and you could obtain a 5-year loan from your credit union, at 7 percent APR. Which deal is cheaper?
Create the amortization schedule for a loan of $15,000, paid monthly over three years using a 9 percent APR.
Create the amortization schedule for a loan of $5,000, paid monthly over two years using an 8 percent APR.
Monica has decided that she wants to build enough retirement wealth that, if invested at 8 percent per year, will provide her with $3,500 of monthly income for 20 years. To date, she has saved nothing, but she still has 30 years until she retires. How much money does she need to contribute per
Ross has decided that he wants to build enough retirement wealth that, if invested at 7 percent per year, will provide him with $3,000 of monthly income for 30 years. To date, he has saved nothing, but he still has 20 years until he retires. How much money does he need to contribute per month to
Rachel purchased a $15,000 car three years ago using an 8 percent, 4-year loan. She has decided that she would sell the car now, if she could get a price that would pay off the balance of her loan. What is the minimum price Rachel would need to receive for her car?
Hank purchased a $20,000 car two years ago using a 9 percent, 5-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What’s the minimum price Hank would need to receive for his car?
A mortgage broker is offering a $183,900, 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 4 percent APR interest rate. After the second year, the mortgage interest rate charged increases to 7 percent APR. What are the
A mortgage broker is offering a $279,000, 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 4.5 percent APR interest rate. After the second year, the mortgage interest rate charged increases to 7.5 percent APR. What are the
Consider a person who begins contributing to a retirement plan at age 25 and contributes for 40 years until retirement at age 65. For the first ten years, she contributes $3,000 per year. She increases the contribution rate to $5,000 per year in years 11 through 20. This is followed by increases
What is the present value, when interest rates are 7.5 percent, of a $50 payment made every year forever?
What is the present value, when interest rates are 8.5 percent, of a $75 payment made every year forever?
If the present value of an ordinary, 7-year annuity is $6,500 and interest rates are 7.5 percent, what’s the present value of the same annuity due?
If the present value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what’s the present value of the same annuity due?
If the future value of an ordinary, 7-year annuity is $6,500 and interest rates are 8.5 percent, what is the future value of the same annuity due?
If the future value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what’s the future value of the same annuity due?
A loan is offered with monthly payments and a 10 percent APR. What’s the loan’s effective annual rate (EAR)?
A loan is offered with monthly payments and a 13 percent APR. What’s the loan’s effective annual rate (EAR)?
Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $590 in two weeks. What is the compounded annual rate implied by this 18 percent rate charged for only two weeks?
What’s the interest rate of a 7-year, annual $4,000 annuity with present value of $20,000?
To borrow $500, you are offered an add-on interest loan at 8 percent. Two loan payments are to be made, one at six months and the other at the end of the year. Compute the two equal payments.
To borrow $800, you are offered an add-on interest loan at 7 percent. Three loan payments are to be made, one at four months, another at eight months, and the last one at the end of the year. Compute the three equal payments.
Consider Gavin, a new freshman who has just received a Stafford student loan and started college. He plans to obtain the maximum loan from Stafford at the beginning of each year. Although Gavin does not have to make any payments while he is in school, the unsubsidized 6.8 percent interest owed
Consider that you are 35 years old and have just changed to a new job. You have $80,000 in the retirement plan from your former employer. You can roll that money into the retirement plan of the new employer. You will also contribute $3,600 each year into your new employer’s plan. If the
Consider that you are 45 years old and have just changed to a new job. You have $150,000 in the retirement plan from your former employer. You can roll that money into the retirement plan of the new employer. You will also contribute $7,200 each year into your new employer’s plan. If the
Your client has been given a trust fund valued at $1 million. He cannot access the money until he turns 65 years old, which is in 25 years. At that time, he can withdrawal $25,000 per month. If the trust fund is invested at a 5.5 percent rate, how many months will it last your client once he
Your client has been given a trust fund valued at $1.5 million. She cannot access the money until she turns 65 years old, which is in 15 years. At that time, she can withdraw $20,000 per month. If the trust fund is invested at a 5 percent rate, how many months will it last your client once she
A local furniture store is advertising a deal in which you buy a $3,000 dining room set and do not need to pay for two years (no interest cost is incurred). How much money would you have to deposit now in a savings account earning 5 percent APR, compounded monthly, to pay the $3,000 bill in two
A local furniture store is advertising a deal in which you buy a $5,000 living room set with three years before you need to make any payments (no interest cost is incurred). How much money would you have to deposit now in a savings account earning 4 percent APR, compounded monthly, to pay the
Say that you purchase a house for $200,000 by getting a mortgage for $180,000 and paying a $20,000 down payment. If you get a 30-year mortgage with a 7 percent interest rate, what are the monthly payments? What would the loan balance be in ten years? If the house appreciates at 3
Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and paying a $15,000 down payment. If you get a 15-year mortgage with a 7 percent interest rate, what are the monthly payments? What would the loan balance be in five years? If the house appreciates at 4 percent per
You have secured a loan from your bank for two years to build your home. The terms of the loan are that you will borrow $200,000 now and an additional $100,000 in one year. Interest of 10 percent APR will be charged on the balance monthly. Since no payments will be made during the 2-year loan,
You have secured a loan from your bank for two years to build your home. The terms of the loan are that you will borrow $100,000 now and an additional $50,000 in one year. Interest of 9 percent APR will be charged on the balance monthly. Since no payments will be made during the 2-year loan, the
Classify the following transactions as taking place in the primary or secondary markets:a. IBM issues $200 million of new common stockb. The New Company issues $50 million of common stock in an IPOc. IBM sells $5 million of GM preferred stock out of its marketable securities portfoliod. The
Classify the following financial instruments as money market securities or capital market securities:a. Federal fundsb. Common stockc. Corporate bondsd. Mortgagese. Negotiable certificates of depositf. U.S. Treasury billsg. U.S. Treasury notesh. U.S. Treasury bondsi. State and government bonds
What are the different types of financial institutions? Include a description of the main services offered by each.
How would economic transactions between suppliers of funds (e.g., households) and users of funds (e.g., corporations) occur in a world without FIs?
Why would a world limited to the direct transfer of funds from suppliers of funds to users of funds likely result in quite low levels of fund flows?
How do FIs reduce monitoring costs associated with the flow of funds from fund suppliers to fund users?
How do FIs alleviate the problem of liquidity risk faced by investors wishing to invest in securities of corporations?
Discuss and compare the three explanations for the shape of the yield curve.
What are six factors that determine the nominal interest rate on a security?
What should happen to a security’s equilibrium interest rate as the security’s liquidity risk increases?
Are the unbiased expectations and liquidity premium theories explanations for the shape of the yield curve completely independent theories? Explain why or why not.
Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:1R1 = 6%E(2r1) = 7%E(3r1) = 7.5%E(4r1) = 7.85%
Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:1R1 = 1%E(2r1) = 3.75%E(3r1) = 4.25%E(4r1) = 5.75%
Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:R1 = 0.65%E(2r1) = 1.75% ................................L2 = 0.05%E(3r1) = 1.85% ................................L3 = 0.10%E(4r1) = 2.15%
Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:R1 = 1.25%E(2r1) = 2.15% .............................L2 = 0.08%E(3r1) = 2.55% .............................L3 = 0.10%E(4r1) = 3.00%
Suppose we observe the following rates: 1R1 = 8 percent, 1R2 = 10 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year interest rate expected one year from now, E(2r1)?
The Wall Street Journal reports that the rate on 4-year Treasury securities is 1.60 percent and the rate on 5-year Treasury securities is 2.15 percent. According to the unbiased expectations theories, what does the market expect the 1-year Treasury rate to be four years from today, E(5r1)?
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