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**Unformatted text preview: **Prof. Q. Ma, HADM 2222 Fall 09 1/8 HADM 2222 Fall 2009, Prof. Q. Ma Practice Problems for Prelim I 1. Investment X offers to pay you $7,000 per year for eight years, whereas Investment Y offers to pay you $9,000 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5%? If the discount rate is 22%? 2. If you deposit $3,000 at the end of each of the next 20 years into an account paying 10.5% interest, how much money will you have in the account in 20 years? How much will you have if you make deposits for 40 years? 3. The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $20,000 per year forever. If the required return on this investment is 8%, how much will you pay for the policy? 4. First National Bank charges 13.1% compounded monthly on its business loans. First United Bank charges 13.4% compounded semiannually. As a potential borrower, which bank would you go to for a new loan? Prof. Q. Ma, HADM 2222 Fall 09 2/8 5. Corpstein Credit Bank is offering 8.4% compounded daily on its savings accounts. If you deposit $6,000 today, how much will you have in the account in 5 years? In 20 years? 6. Big Dom’s Pawn Shop charges an interest rate of 25% per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? What is the effective annual rate? 7. You want to buy a new sports coupe for $61,800, and the finance office at the dealership has quoted you a 7.4% APR loan or 60 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan? 8. One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $300 per month. You will charge .9% per month interest on the overdue balance. If the current balance is $17,000, how long will it take for the account to be paid off? Prof. Q. Ma, HADM 2222 Fall 09 3/8 9. You are planning to make monthly deposits of $250 into a retirement account that pays 10% compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 30 years? 10. Beginning three months from now, you want to be able to withdraw $1,500 each quarter from your bank account to cover college expenses over the next four years. If the account pays .75% interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years? 11. You are looking at an investment that has an effective annual rate of 18%. What is the effective semiannual return? The effective quarterly return? The effective monthly return?...

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