Numerical Questions
1. How much would you have in eight years if you deposit $5,000 at the beginning of
each year for eight years and the interest rate is 4% compounded annually?
A) $36,842.84
B) $42,491.47
C) $46,071.13
D) $47,913.98
E) $51,375.02
Solution D
Note that we are dealing with an annuity due.
Option 1: Use calculator and set
BGN
mode
PMT=5000, n= 8, i = 4, PV = 0,
Comp FV
Æ
47,913.98
Option 2: Find FV of ordinary annuity and adjust by 1 period:
PMT=5000, n= 8, i = 4, PV=0,
Comp FV
Æ
46,071.13 x 1.04 =
47,913.98
2. You are planning on taking out a $200,000 mortgage to purchase a condo in
Newmarket and the posted mortgage rate is 3.50% (APR compounded
semiannually). Assuming that monthly payments begin in one month, how much
interest will you save by choosing a 20 year amortization period versus a 30 year
amortization period (assume that rates do not change over the life of the loan).
A) $12,408
B) $24,776
C) $44,546
D) $52,319
E) $77,769
Solution C
Find the semiannual rate: i
s
= 3.50/2 = .0175
Find EAR:
EAR = (1.0175)
2
– 1 = .035306
Find the monthly rate: i
m
= (1+ 0.035306)
1/12
1 = 0.002896
Option 1: 20 year mortgage
n = 20yrs x 12mths/yr = 240 months
Find the monthly payment using your calculator:
PV=

200,000, n=240, i=0.2896%, FV=0, Comp PMT