tvmpracticeset2solutions

# tvmpracticeset2solutions - Solutions to TVM Practice Set II...

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Solutions to TVM Practice Set II 1. In this problem you are solving for the monthly rate of return and then the yearly rate of return. There are 228 months in 19 years (19 * 12 = 228). a) To determine the monthly rate of return: 1 ) 100 , 1 \$ 438 , 13 \$ ( 228 1 - = 1.104% N = 228, PV = -\$1,100, FV = \$13,438; compute I b) To determine the yearly rate of return : 1 ) 100 , 1 \$ 438 , 13 \$ ( 19 1 - = 14.079% N = 19, PV = -\$1,100, FV = \$13,438; compute I 2. You should disagree with Jim. You do not owe \$1,900 for the entire year since you are making monthly payments that would reduce the outstanding loan balance. If your total interest payments are \$380, the true rate of interest is much higher than 20%. You would need to set up the problem and solve for r (a monthly rate) in the PVIFA equation. You could convert the monthly rate to an A.P.R. by multiplying it by 12. The true A.P.R. is 35.07%, not 20% as Jim is suggesting. => \$1,900 = \$190 * [ ( ) ] 1 1 1 12 - + r r Now, use a financial calculator to solve for the monthly rate of interest (r). On a financial calculator: N = 12, PV = 1,900, PMT = -190; compute I => r = 2.923% per month => 2.923% * 12 = 35.07% APR => The E.A.R on the loan would be found as follows: (1.02923) 12 –1 = 41.30% 3. Here you must solve for the E.A.R of an annuity due . The easiest way to solve this problem is to set your calculator to BEGIN mode, directly solve for the monthly rate, and then convert the monthly rate to an effective rate. ON BEGIN MODE: N = 24, PV = \$1150, PMT = -\$60; compute I I = 2.0632% per month Convert to an E.A.R.: (1.020632) 12 –1 = 27.77% F301 TVM practice set II solutions 1

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As an alternative, if you recognize that the first payment is at time zero, you can solve the problem as follows: => \$1150 - \$60 = \$60 * ] r ) r 1 ( 1 1 [ 23 + - , which is equivalent to solving the problem as if the present value were \$1090 and there are 23 months of \$60 payments. => \$1090 = \$60 * ] r ) r 1 ( 1 1 [ 23 + - ; solve for r on a financial calculator as follows: N = 23, PV = \$1090, PMT = -\$60; compute I; I = 2.0632% per month, Convert to an E.A.R.: (1.020632) 12 –1 = 27.77% 4. There are several ways to solve this problem.
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## This note was uploaded on 01/13/2011 for the course BUS A202 taught by Professor Tindall during the Spring '10 term at IUPUI.

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tvmpracticeset2solutions - Solutions to TVM Practice Set II...

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