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 tradein
is $8,000, and your tradein will be your down payment. The remaining balance can be
financed with a fiveyear 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 2year 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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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?
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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?
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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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 Spring '10
 TINDALL
 Management, Interest Rates, Annual Percentage Rate, Net Present Value, effective annual rate

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