Question: This problem has three parts: a.) Assume you to need to have $25,000 in five years. How much would you need to deposit into a
This problem has three parts:
a.) Assume you to need to have $25,000 in five years. How much would you need to deposit into a bank account today (i.e., a one-time deposit) in order to have $25,000 on this date in 2026 if your money will earn an APR of 6% with quarterly compounding? That is, what is the PV of $25,000 due in 5 years if the interest rate is 6%, compounded quarterly? Please provide your answer to (a) below.
b.) You have just been offered a Capital One credit card, but your FICO score is only 600. Because your score is only marginally above the sub-prime threshold the APR will be 29.99% with monthly payments (which means m = 12 in terms of your effective rate on outstanding balances). What is the effective annual interest rate (EFF or EAR) on your 29.99% APR rate for the Capital One credit card? Please round your answer to the 2nddecimal place after converting your answer into percent terms. Please provide your answer to (b) below.
c.) What is the present value of a perpetuity (PVPerp) which will pay the holder $5,000 once each year forever if the interest rate (r) is 5% compounded annually? Please provide your answer to (c) below.
a.) Present value (PV):
b.) Effective Annual Rate (EFF in %):
c.) PVPerpetuity :
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