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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 4-15SOLUTIONS TO SELF-TESTWhat is the future value of $100 after 3 years if the appropriate interest rate is 8%, compounded annually? N3I8%PV-$100PMT$0FV$125.97 Compounded monthly?N36I0.67%PV-$100PMT$0FV$127.02 N3I8%PMT$0FV$100PV$79.38Compounded monthly?N36I0.67%PMT$0FV$100PV$78.73Nominal rate18%Comp/year12Effective rate19.56%=(1+B35/B36)^B36-119.56%=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 4-16SOLUTIONS TO SELF-TESTLoan$1,000,000 Interest rate9%Days/year360Interest pd (days)30Interest paid$7,500What would the interest be if the bank used a 365-day year?Loan$1,000,000 Interest rate9%Days/year365Interest pd (days)30Interest paid$7,397.26Loan$1,000 Interest rate7%Comp/year365Time period (months)7Effective rate7.250098%Account value$1,041.67Suppose 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 4-17SOLUTIONS TO SELF-TESTYears5Months = N60Nom. I6%Periodic I0.5000%PV$100,000FV$0 PMT$1,933.28First payment interest:$500.00 =B10*B11First payment principal:$1,433.28 =B13-C15N3I8%PV$30,000FV$0 PMT-$11,641.01Loan Amortization Schedule, $30,000 at 8% for 3 YearsAmount borrowed:$30,000 Years:3Rate:8%PMT:-$11,641.01Payment (2)Interest (3)Year1$30,000.00 $11,641.01$2,400.00 $9,241.01$20,758.992$20,758.99 $11,641.01$1,660.72 $9,980.29$10,778.713$10,778.71 $11,641.01$862.30 $10,778.71$0.00Rather 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 4-18SOLUTIONS TO SELF-TESTIf the nominal interest rate is 10% and the expected inflation rate is 5%, what is the expected real rate of return? 10%Inflation5%4.7619%rNOMrr=((1+rNOM)/(1+Inflation))-1 =