Suppose you and your spouse have $40,000 in a money market account. Now you plan to purchase

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Question:

Suppose you and your spouse have $40,000 in a money market account. Now you plan to purchase a house. Your bank requires that your monthly mortgage payment should not exceed one third of your household income. If your monthly household income is $5,400, and an 8.4% 30 year loan (with a monthly payment) is available, what is the maximum price of a house you can afford?

Tom plans to invest $10,000 each year for 10 years (10 times) with the first investment one year from now. How much will he have accumulated by the end of 25 years at the rate of 9%, if he withdraws nothing from the account?

What is the present value of a ten year annuity whose payment will be $20,000 next year and then will increase at 3% every year as a protection from inflation? The discount rate on the annuity is 6.4%.

Three years ago, you bought a 5 year, 9% bond (par value = $1,000) for $816.67. Today (after the 6th interest payment), you sold the bond for $1058.33. What is your annual rate of return for the three year period? All coupon payments are semi-annual.

Are you willing to buy a 9% coupon bond with a $1,000 par value and 5 year term to maturity, for which interest is paid semiannually? (The current market price is $895, and your target return is 10% a year.) Why or why not?