An investment costs 465 and is expected to produce cash flows of 100 at the end

# An investment costs 465 and is expected to produce

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An investment costs \$465 and is expected to produce cash flows of \$100 at the end Year 1, \$200 at the end of Year 2, and \$300 at the end of Year 3. What is the expected rate of return on this investment?
SECTION 4-15 SOLUTIONS TO SELF-TEST What is the future value of \$100 after 3 years if the appropriate interest rate is 8%, compounded annually? N 3 I 8% PV -\$100 PMT \$0 FV \$125.97 Compounded monthly? N 36 I 0.67% PV -\$100 PMT \$0 FV \$127.02 N 3 I 8% PMT \$0 FV \$100 PV \$79.38 Compounded monthly? N 36 I 0.67% PMT \$0 FV \$100 PV \$78.73 Nominal rate 18% Comp/year 12 Effective rate 19.56% =(1+B35/B36)^B36-1 19.56% =EFFECT(B35,B36) What is the present value of \$100 due in 3 years if the appropriate interest rate is 8%, compounded annually? Credit card issuers must by law print their annual percentage rate (APR) on their monthly statements. A common APR is 18%, with interest paid monthly. What is the EFF% on such a loan?
SECTION 4-16 SOLUTIONS TO SELF-TEST Loan \$1,000,000 Interest rate 9% Days/year 360 Interest pd (days) 30 Interest paid \$7,500 What would the interest be if the bank used a 365-day year? Loan \$1,000,000 Interest rate 9% Days/year 365 Interest pd (days) 30 Interest paid \$7,397.26 Loan \$1,000 Interest rate 7% Comp/year 365 Time period (months) 7 Effective rate 7.250098% Account value \$1,041.67 Suppose a company borrowed \$1 million at a rate of 9%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would the firm have to pay in a 30-day month? Suppose you deposited \$1,000 in a credit union that pays 7% with daily compounding and a 365-day year. What is the EFF%, and how much could you withdraw after 7/12 of a year?
SECTION 4-17 SOLUTIONS TO SELF-TEST Years 5 Months = N 60 Nom. I 6% Periodic I 0.5000% PV \$100,000 FV \$0 PMT \$1,933.28 First payment interest: \$500.00 =B10*B11 First payment principal: \$1,433.28 =B13-C15 N 3 I 8% PV \$30,000 FV \$0 PMT -\$11,641.01 Loan Amortization Schedule, \$30,000 at 8% for 3 Years Amount borrowed: \$30,000 Years: 3 Rate: 8% PMT: -\$11,641.01 Payment (2) Interest (3) Year 1 \$30,000.00 \$11,641.01 \$2,400.00 \$9,241.01 \$20,758.99 2 \$20,758.99 \$11,641.01 \$1,660.72 \$9,980.29 \$10,778.71 3 \$10,778.71 \$11,641.01 \$862.30 \$10,778.71 \$0.00 Rather than focus on Year 1 data, we just constructed the full amortization schedule. Consider again the example in Figure 4-11. If the loan were amortized over 5 years with 60 monthly payments, how much would each payment be, and how would the first payment be divided between interest and principal? Suppose you borrowed \$30,000 on a student loan at a rate of 8% and now must repay it in 3 equal installments at the end of each of the next 3 years. How large would your payments be, how much of the first payment would represent interest and how much would be principal, and what would your ending balance be after the first year? Beginning Amount (1) Repayment of Principal (4) Ending Balance (5)
SECTION 4-18 SOLUTIONS TO SELF-TEST If the nominal interest rate is 10% and the expected inflation rate is 5%, what is the expected real rate of return? 10% Inflation 5% 4.7619% r NOM r r =((1+r NOM )/(1+Inflation))-1 =
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