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B1StudyPack2010

# B1StudyPack2010 - F370 B1 Study Pack Page 1 2010 Dan...

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F370 B1 Study Pack -- Page 1 © 2010 Dan Greiner Study Pack for the B1 Lecture Vocabulary for the B1 Lecture Utility vs. Value Wealth Transfer Creating Value, Destroying Value, NPV (Net Present Value) …or Net Value Created Interest Rate vs. Competitive Rate vs. Implied Return Amortized Debt Loan Balance Downpayment Refinance a Loan Teaser Loan Underwater Loan Introductory Rate and Payment Negative Amortization Formulas for the B1 Lecture LA = (PMT / i) (1 - 1/(1+i) n ) …or PMT = LA (i) / (1 - 1/(1+i) n ) Net Gain to Refinancing (or NPV of refinancing) = PV (savings stream) – fees DV = P 0 – CP

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F370 B1 Study Pack -- Page 2 © 2010 Dan Greiner Problem Set for B1 Lecture 1. Consider a loan for a loan amount of \$36,000 and a term of 6 years. To the nearest dollar, fill out the two missing rows (PMT and Bal 3 ) in the table below: i=0% i=3% i=6% i=9% PMT Bal 0 36,000 36,000 36,000 36,000 Bal 3 Bal 6 0 0 0 0 2. Consider a loan for a loan amount of \$36,000 that features 72 monthly payments over six years. To the nearest dollar, fill out the two missing rows (PMT and Bal 36 ) in the table below:: i=0% i=3% i=6% i=9% PMT Bal 0 36,000 36,000 36,000 36,000 Bal 36 Bal 72 0 0 0 0 3. You are interested in a new boat that has a CP=\$41,000 and current competitive loan rates are at r = 6% in the markets. If you sign a loan with: loan amount = \$45,000, interest rate = 9% per year, and term equal to 100 months, then by how much are you overpaying the dealer (compared to a fair amount) each month? How much value are you destroying?
F370 B1 Study Pack -- Page 3 © 2010 Dan Greiner 4. You are pursuing the purchase of a new car at a local dealership. The car’s competitive price is CP = \$27,300 and competitive rates on a 60-month loan are currently at r = 4.5% per year. The salesperson presents you with three 60-month offers to choose from: LA i PMT DV Bal 18 A 32,880.00 0.0% 548 B 29,501.66 4.5% 550 C 26,495.36 9.0% 550 Fill in the two right-most columns in the table above …the amount of value you would destroy (DV) with the loan and the balance on each loan if you needed to pay it off after 18 months.

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