End Of Chapter Answers Ch4-16

# End Of Chapter Answers Ch4-16 - Ghapter 4 No.8 a. Timeline:...

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Ghapter 4 No.8 a. Timeline: r8 0 l8 0 l9 I 19 20 t2 20 21 23 21 J b. rtlT- 3,996 FV = 3,996(1.08)7 = 6,848.44 Timeline: tttt 3,996 FV = 3,996(1.08)47 =748,779 c. Timeline: 0r No. l0 I,000 1,000 r,000 First, calculate the present value of the cash flows: 1.000 r.000 1.000 PV =-+ 3+7 =952+907 +864=2,723 1.05 1.05' 1.05' Once you know the present value of the cash flows, cornpute the future value (of this present value) at date 3. FV, = 2,723x1.053 =3,152

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No 18 a. Timeline: t2 0 c. Timeline: t2 0 1,200 2t 22 23 24 0123 30 18 ___l I 1,200 l3 I 14 2 l5 J To pay off the mortgage you must repay the remaining balance. The remaining balance is equal to the present value of the remaining payments. The remaining paymgnts are an 18 year annuity, so: r-> Py 1.200( 1 \ PV =-l l-_- | ' ' - 0.06 l'. t.oo't / =12,993.12 b. Timeline: 30 l0 --l I 1,200 To pay offthe mortgage you must repay the remaining balance. The remaining balance is equal to the present value of the remaining payments. The remaining payments are a l0 year annuity, so: 1.200 ( I \ PV =:_l I ___: I = g- 932.10 0.06 \ t.o6'u ) r3 1 14 2 l5 J ,, t,ro 1,200 7,200 7,200 If you decide to pay offthe mortgage immediately before the l2thpayment, you will have to pay exactly what you paid in part (a) as well as the 12th payment itselfi 12,993.12 + 1,200 = 74,193.12 7,200 1,200 1,200
2 z(t.Os) 2(1.0s)'z This is a l7-year growing annuity. By the growing annuity formula we have 2.000. 000 r / r.os \tt ) PV=iJ-l l_l -l l=21,861,455.80 0.1-0.05\ \l.r/ / Timeline: (From the perspective of the bank) 012 300.000 t =-T-a--lJ =s24'ti6 -l r _- I o.o7 [- r.o73o ) No.29 Timeline: (where X is the balloon payment.) 0123 -300,000 23,500 23,500 23,500 )'u No.27 30 --l C 30 I I 23,500 + X The present value of the loan payments must be equal to the amount borrowed: 23.s00( I \ x 300,000 = -l I _- rr - Solving for X: I z3.soo( I \l . .2n x = [roo, 000 -ffi [t -,-rJ] (r.oz)" = \$63, 848

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Chapter 5 No. 4. For a \$l invested in an account with l0% APR with monthly compounding you will have / o.r \" I I +- I = \$1.10471 So the EAR is 10.471% \ tzl For a \$l invested in an account with 10% APR with annual compounding you will have (t +o.r) = \$l.lo,So the EAR is lo% For a \$l invested in an account wrthg% ApR with daily compounding you will have / o.og Yu' I I +- I = 1.09416 So the EAR is9.4t6yo \ sosl No.2l ,- = t-i -7'85%-12'3% ' t+i ,at =-3'96%o The purchasing power of your savings decrined by 3.96%over the year. Iq' z-l By holding cash, an investor earns a nominal interest rate of 0%. Since an investor can always earn at least 0Yo'the nominal interest rate cannot be negative. The real interest rate can be negative, however. It is negative whenever the rate of inflation exceeds the nominal interest rate.
Chapter 6 No.2 a. Timeline: 10 -8 -8 -8 8( r ) NPV=10- | l-'-- l=-\$9.895million o.r [ (t.t)' ) b. Timeline: 0t234 10 -8 -8 -8 s 5(1 - 0.3)s(1 - 03)2 First calculate the PV of the royalties atyear 3. The royalties are a declining perpetuity: 55 PV. = =-=12.5million

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## This note was uploaded on 09/08/2010 for the course BUS 173A at San Jose State.

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End Of Chapter Answers Ch4-16 - Ghapter 4 No.8 a. Timeline:...

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