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Recitation1_Chapter4_MB_fa11 - how you would go from a...

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Money and Banking (Fall 2011) Recitation #1 on Thursday (9/15) Chapter 4: Recitation today is just some applications of PDV. You should be able to write out an equation to estimate the PDV and analyze it. 1. (YTM on a simple loan) Suppose you borrow $200 from your friend today and promise to her pay back $210 one year later. What is the YTM on this loan? 2. (YTM on a fixed payment loan) You are considering buying a BMW Z4 Roadster. It’s going to cost you $60,000 after you load it up with all the options that you want. BMW is willing to provide you financing. Here are the terms: $0 money down, pay $1400 a month for 48 months. Write out the equation that you would use to calculate the monthly YTM on this loan. Discuss
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Unformatted text preview: how you would go from a monthly interest rate to an annual interest rate. 3. Suppose that in exchange for allowing a road to pass through his farmland, John had been promised that he and future owners of his land will be paid $135 per year, in perpetuity, by the township he lives in. Now, however, the township has offered a one-time payment of $1125, in exchange for his giving up the right to receive the annual $135 payment. If John believes that interest rates are 10%, then should John accept this offer? At what interest rate would John be indifferent between taking the offer or rejecting it? 4. Questions and Problems from the text: 2 and 8...
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