Homework_1_Solutions - Homework #1 Solutions FIN340 FALL...

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1 Homework #1 – Solutions FIN340 – FALL 2006 Professor Gormley, gormley@wustl.edu Distributed: September 5th, 2006 Due: Tuesday, September 12th, 2006 [in class] Note: Please show all work and circle your final answer to make grading easier. Homework Assignments may be done in groups of up to four students and should be submitted jointly. 1. After retirement, you expect to live for 25 years. You would like to have $75,000 income each year. How much should you have saved in the retirement to receive this income, if the interest is 9% per year (if payments start one year after the retirement)? You need to calculate the PVA (present value of the annuity) that spans 25 years at $75,000 per year, with a discount rate of 9%. ! " ! " # $ % ( ) ( * + # $ % % ( ( * + 25 1 1 1 75000 1 1 $736,693.47 0.09 1.09 n CF PVA r r PVA 2. Joe Home has taken a $250,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for twenty equal annual payments, what is the amount of each payment? Again, you need to use the PVA formula, but this time solve the payment of an annuity with a PVA = $250,000, discount rate 6%, and n=20. ! " ! " # $ % ( ) ( * + # $ % ( ( * + % 20 1 1 1 1 250,000 1 0.06 1.06 $21,796.14 n CF PVA r r CF CF 3. If the present value of $1.00 received n years from today at an interest rate of r is 0.3855, then what is the future value of $1.00 invested today at an interest rate of % for years?
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2 From the first statement, we know that % ) 0.3855 1/(1 ) n r . The future value of $1.00 invested at an interest rate r% for n years is ) (1 ) n r . And ) % % (1 ) 1/0.3885 $2.594 n r 4. Many college students run up large credit card debts and then proceed to just make the minimum payment each month. This is not something I recommend. To see why, consider a student that has $2000 in debt that makes the minimum payment of $40 each month. When the interest rate on the card is 1.5 percent each month (which is not unusual), how many years will it take to pay off this credit card? How much in total interest will this student end up paying? Hmm… we again need the PVA formula.
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This note was uploaded on 09/21/2009 for the course B 340 taught by Professor Narg during the Spring '09 term at Washington University in St. Louis.

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Homework_1_Solutions - Homework #1 Solutions FIN340 FALL...

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