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Extra+exercises+INCL+SOLUTIONS+topic+2_+Time+value+of+money

# Extra+exercises+INCL+SOLUTIONS+topic+2_+Time+value+of+money...

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Topic II. Time value of money – Extra exercises 1 Esther Eiling – MGTB09 Fall 2010

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Exercise 1 Linda takes on a \$7,000 loan to travel around the world. The loan needs to be repaid in four quarterly installments, starting one quarter from now. The annual interest rate, based on semi-annual compounding, is 8%. a) Calculate the quarterly interest rate. b) Calculate the quarterly payment. c) Complete the amortization schedule: Period Begin. Princ. outstanding PMT Interest Principal repayment End. Princ. outstanding 1 2 3 4 2 Esther Eiling – MGTB09 Fall 2010
Solution exercise 1 a) First, calculate the EAR. Note that QR = 8%, m = 2. Then, calculate the quarterly rate. We know that Hence: % 16 . 8 0816 . 0 1 2 08 . 0 1 2 = = - + = EAR ( 29 EAR k quarterly = - + 1 1 4 ( 29 % 9804 . 1 019804 . 0 1 0816 . 1 1 1 4 / 1 4 / 1 = = - = - + = quarterly quarterly k EAR k 3 Esther Eiling – MGTB09 Fall 2010

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Solution exercise 1 (ctd) a) To calculate the quarterly payment, use the formula for the PV of an ordinary annuity. Note that everything should be in quarters!
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