Practice Problem 42
You invest $1,000 at a 6% annual interest rate, stated as an APR. Interest is
compounded monthly. How much will you have in 1 year? In 1.5 years?
Amount invested
APR
#
6.00%
1.00 y
Practice Problem 41
A retiree wants level consumption in real terms over a 30-year retirement. If the
inflation rate equals the interest rate she earns on her $450,000 of savings, how
much can she spe
Practice Problem 40
The $40 million lottery payment that you just won actually pays $2 million per year for 20 years.
If the discount rate is 8% and the first payment comes in 1 year, what is the pres
Practice Problem 39
Youve borrowed $4,248.68 and agreed to pay back the loan with monthly payments
of $200. If the interest rate is 12% stated as an APR, how long will it take you to pay
back the loan
Practice Problem 38
Consider a 4-year amortizing loan. You borrow $1,000 initially, and repay it in four equal annual
year-end payments.
a.
If the interest rate is 8%, show that the annual payment is
Practice Problem 36
Home loans typically involve points, which are fees charged by the lender. Each point charged
means that the borrower must pay 1% of the loan amount as a fee.
For example, if the l
Practice Problem 35
Suppose that you will receive annual payments of $10,000 for a period of 10 years. The first
payment will be made 4 years from now. If the interest rate is 5%, what is the present
Practice Problem 34
a.
If you borrow $1,000 and agree to repay the loan in five equal annual payments at an interest
rate of 12%, what will your payment be?
b.
What if you make the first payment on th
Practice Problem 33
A store offers two payment plans. Under the installment plan, you pay 25% down
and 25% of the purchase price in each of the next 3 years. If you pay the entire bill
immediately, yo
Practice Problem 32
A store offers two payment plans. Under the installment plan, you pay 25% down
and 25% of the purchase price in each of the next 3 years. If you pay the entire bill
immediately, yo
Practice Problem 31
Your landscaping company can lease a truck for $8,000 a year (paid at year end) for 6 years.
It can instead buy the truck for $40,000. The truck will be valueless after 6 years. Th
Practice Problem 30
Your landscaping company can lease a truck for $8,000 a year (paid at year end) for 6 years.
It can instead buy the truck for $40,000. The truck will be valueless after 6 years. If
Practice Problem 30
Your landscaping company can lease a truck for $8,000 a year (paid at year end) for 6 years.
It can instead buy the truck for $40,000. The truck will be valueless after 6 years. If
Practice Problem 29
If you take out an $8,000 car loan that calls for 48 monthly payments of $240 each,
what is the APR of the loan? What is the effective annual interest rate on the loan?
What if the
Practice Problem 28
If you take out an $8,000 car loan that calls for 48 monthly payments of $240 each, what is the APR of
the loan? What is the effective annual interest rate on the loan?
Car loan
No
Practice Problem 26
In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan
is stated as $10,000 and the interest rate is 10%, the borrower pays .10 x $10,000
Practice Problem 25
You want to buy a new car, but you can make an initial payment of only $2,000 and can afford
monthly payments of at most $400.
a.
If the APR on auto loans is 12% and you finance th
Practice Problem 24
Professors Annuity Corp. offers a lifetime annuity to retiring professors. For a payment
of $80,000 at age 65, the firm will pay the retiring professor $600 a month until death.
a.
Practice Problem 23
a.
What is the present value of a 3-year annuity of $100 if the discount rate is 6%?
b.
What is the present value of the annuity in (a) if you have to wait 2 years instead
of 1 yea
Practice Problem 22
If you take out an $8,000 car loan that calls for 48 monthly payments starting after 1 month at an APR
of 10%, what is your monthly payment? What is the effective annual interest r
Practice Problem 21
In mid-2010 a pound of apples cost $1.26, while oranges cost $1.10. Ten years earlier the price
of apples was only $.92 a pound and that of oranges was $.70 a pound. What was the a
Quiz 20
A famous quarterback just signed a $15 million contract providing $3 million a year for
5 years. A less famous receiver signed a $14 million 5-year contract providing $4 million
now and $2 mil
Quiz 19
A zero-coupon bond that will pay $1,000 in 10 years is selling today for $422.41.
What interest rate does the bond offer?
Face value
Time
Market Value
#
10.00
$422.41
Solution:
Interest rate =
Quiz 17
Old Time Savings Bank pays 4% interest on its savings accounts. If you deposit
$1,000 in the bank and leave it there, how much interest will you earn in the first
year? The second year? The te
Quiz 16
Investments in the stock market have increased at an average compound rate of about
5% since 1900. It is now 2012.
a.
If you invested $1,000 in the stock market in 1900, how much would that in
Quiz 15
Lenny Loanshark charges 1 point per week (that is, 1% per week) on his loans. What APR
must he report to consumers? Assume exactly 52 weeks in a year. What is the effective
annual rate?
Loan C
Quiz 14
Suppose you can borrow money at 8.6% per year (APR) compounded semiannually or 8.4% per
year (APR) compounded monthly. Which is the better deal?
APR compounded semiannually
APR compounded mont
Quiz 13
If you earn 6% per year on your bank account, how long will it take an account with $100 to
double to $200?
Interest rate
PV
FV
6.00%
$100.00
$200.00
Solution:
Time period
=
11.9 years