Problem set 2 solutions

Problem set 2 solutions - F301 Financial Management 2010...

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F301 Page 1 of 8 Fall 2010 F301 - Financial Management 2010 Fall Problem Set 2 Solutions Assignments should be handed in on a separate sheet of paper. If you have multiple sheets, please staple your assignment together. Make sure questions are in order and professionally completed. Please show your work in a professional, businesslike fashion. It should be neither crowded nor illegibly tiny. Make this assignment look like something you could present to your boss. Full credit will only be given when you show your work. Show formulas and equations or calculator inputs (TVM keys). Read each question carefully. Be sure you know what you are being asked to solve for, and you are answering the question which is posed. Each part of each question is worth three points. Total possible points = 69. 1. On my farm loan, I have 15 yearly payments left. Each payment is $3400, and the next payment is due one year from today. If the interest rate as 5% compounded annually, what is the balance on my loan (present value today)? 2. That shiny, black Mustang GT can be yours for just $43,000. The value of your trade-in is $8,000, and your trade-in will be your down payment. The remaining balance can be financed with a five-year car loan at an interest rate of 6.0% compounded monthly. What will be the amount of your monthly payment (at the end of each month)? I have $10,000 which I am going to invest in a 2-year Certificate of Deposit (CD) with a quoted rate of 4.0%. Use this information to answer questions 3, 4 and 5. 3. If the interest rate is compounded annually: a. What will this CD be worth when it matures (at the end of two years)? Answer: Find R by dividing APR / m. 4.0% / 1 = 4.0% N I PV PMT FV 15 5% cpt -3,400.00 0 35,290.84 loan balance N I PV PMT FV 60 0.50% 35,000 cpt 0 $676.65 monthly payment N I PV PMT FV 2 4.00% 10,000 0.00 cpt 10,816.00 $ value in 2 years
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F301 Page 2 of 8 Fall 2010 b. What is the effective annual rate? The EAR is 4.0%. When an APR is compounded annually, then APR = EAR. 4. If the interest rate is compounded monthly: a. What will this CD be worth when it matures? R = APR / m = 4.0 / 12 = 0.3333% per month. b. What is the effective annual rate? ± ² ³´µ¶¶·µ¸¹ º » ± ² ³´¼½¶¾¿¸À¹ ºÁ » ±ÂÃÃÄÄÄÄ Å ¹ ºÁ » ±ÂÃÆÃÇ ÈÉÊ » ÆÂÃÇÆËÌ 5. If the interest rate is compounded daily: a. What will this CD be worth when it matures? R = APR / m = 4.0 / 365 = 0.0110% per day. b. What is the effective annual rate? ± ² ³´µ¶¶·µ¸¹ º » ± ² ³´ÍµÎ¸À¹ ÏÐÑ » Ò± ² Ó Â ÃÆ ÄÔÕ Ö× ÏÐÑ » ±ÂÃÆÃØ ÈÉÊ » ÆÂÃØÌ 6. An investor is considering a business opportunity with the following predicted cash flows in each year (i.e., the cash flows are annual for five years). Year
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Problem set 2 solutions - F301 Financial Management 2010...

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