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)