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Unformatted text preview: 1 Exercise: Chapter 5 • Ex 30: At the age of 10, Felix decided that he wanted to attend a very prestigious (and expensive) university. How much will his parents have to save each year to accumulate $40,000 by the time Felix needs the funds in eight years? Assume Felix’s parents can earn 7 percent (compounded annually) on their savings, and that each year’s savings are deposited at the end of the year. Answer: x . 07 1 . 07 8 1 = 40 , 000 x = 3 , 898 . 71 • Ex 46: After losing money playing online poker, Scott visits a loan shark for a $750 loan. To avoid a visit form the “collection agency”, he will have to repay $800 in just one week. What is the nominal interest rate per year? What is the effective interest rate per year? Answer: We compute the nominal interest rate, compounded weekly. Nominal annual rate: 50 750 × 52 = 6 . 67% × 52 = 346 . 67%. Effective annual rate: ( 1 + 50 750 ) 52 1 = 2767 . 44%. • Ex 47: Josephine needs to borrow $180,000 to purchase her new house in Yarmouth, Nova Scotia. She would like to pay off the mortgage in 20 years, making monthly pay ment. For the initial threeyear term, Providence Bank has offered her a quoted annual rate of 6.4%. A. What is the effective annual interest rate? B. What is the effective monthly interest rate? C. How much will Josephine’s monthly mortgage payments be? Answer: Effective Annual rate: ( 1 + 6 . 4% 2 ) 2 1 = 6 . 5024%. Effective monthly rate: ( 1 + 6 . 4% 2 ) 1 / 6 1 = 0 . 5264%. Monthly Payment: x . 5264% h 1 1 (1+0 . 5264%) 12 × 20 i = 180 , 000, x = 1 , 322 . 69....
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This note was uploaded on 11/12/2009 for the course FIN FIN201 taught by Professor Damiano during the Summer '07 term at University of Calgary.
 Summer '07
 Damiano

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