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##### finance problems

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solution

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Question;21. Today is your birthday, and you decide to start saving for;your college education. You will begin college on your 18th birthday and will need;$4,000 per year at the end of;each of the following 4 years. You will;make a deposit one year from today in an account paying 12 percent annually and;continue to make an identical deposit each year up to and including the year;you begin college. If a deposit amount;of $2,542.05 will allow you to reach your goal, what birthday are you;celebrating today?;a. 13 b. 14 c. 15 d. 16 e. 17;22. Assume;that your aunt sold her house on December 31 and that she took a mortgage in;the amount of $10,000 as part of the payment.;The mortgage has a simple interest rate of 10 percent, but it calls for;payments every 6 months, beginning on June 30, and the mortgage is to be;amortized over 10 years. Now, one year;later, your aunt must file Schedule B of her tax return with the IRS informing;them of the interest that was included in the two payments made during the;year. (This interest will be income to;your aunt and a deduction to the buyer of the house.) What is the total amount of interest that was;paid during the first year?;a. $1,604.86 b. $619.98 c. $984.88 d. $1,205.76 e. $750.02;23. Assume that you inherited some money. A friend of yours is working as an unpaid;intern at a local brokerage firm, and her boss is selling some securities that;call for four payments, $50 at the end of each of the next 3 years, plus a;payment of $1,050 at the end of Year 4.;Your friend says she can get you some of these securities at a cost of;$900 each. Your money is now invested in;a bank that pays an 8 percent simple interest rate, but with quarterly;compounding. You regard the securities;as being just as safe, and as liquid, as your bank deposit, so your required;effective annual rate of return on the securities is the same as that on your;bank deposit. You must calculate the;value of the securities to decide whether they are a good investment. What is their present value to you?;a. $957.75 b. $888.66 c. $923.44 d. $1,015.25 e. $893.26;24. Your company is planning to borrow $1,000,000 on a 5-year, 15;percent, annual payment, fully amortized term loan. What fraction of the payment made at the end;of the second year will represent repayment of principal?;a. 57.18% b. 42.82% c. 50.28% d. 49.72% e. 60.27%;25. Your firm can borrow from its bank for one month. The loan will have to be ?rolled over? at the;end of the month, but you are sure the rollover will be allowed. The simple interest rate is 14 percent, but;interest will have to be paid at the end of each month, so the bank interest;rate is 14 percent, monthly compounding.;Alternatively, your firm can borrow from an insurance company at a;simple interest rate that would involve quarterly compounding. What simple quarterly rate would be;equivalent to the rate charged by the bank?;a. 12.44% b. 14.16% c. 13.55% d. 13.12% e. 12.88%;26. Assume that;you have $15,000 in a bank account that pays 5 percent annual interest. You plan to go back to school for a;combination MBA/law degree 5 years from today.;It will take you an additional 5 years to complete your graduate studies. You figure you will need a fixed income of;$25,000 in today?s dollars, that is, you will need $25,000 of today?s dollars;during your first year and each subsequent year. (Thus;your real income will decline while you are in school.) You will withdraw funds for your annual;expenses at the beginning of each year.;Inflation is expected to occur at the rate of 3 percent per year. How much must you save during each of the;next 5 years in order to achieve your goal?;The first increment of savings will be deposited one year from today.;a. $20,241.66 b. $19,224.55 c. $18,792.11 d. $19,559.42 e. $20,378.82;27. You plan to buy a new HDTV.;The dealer offers to sell the set to you on credit. You will have 3 months in which to pay, but;the dealer says you will be charged a 15 percent interest rate, that is, the;simple interest rate is 15 percent, quarterly compounding. As an alternative to buying on credit, you;can borrow the funds from your bank, but the bank will make you pay interest;each month. At what simple bank interest;rate should you be indifferent between the two types of credit?;a. 13.7643% b. 14.2107% c. 14.8163% d. 15.5397% e. 15.3984%;28. Assume that your father is now 50 years old, that he plans to;retire in 10 years, and that he expects to live for 25 years after he retires;that is, until he is 85. He wants a;fixed retirement income that has the same purchasing power at the time he;retires as $60,000 has today (he realizes that the real value of his retirement;income will decline year-by-year after he retires). His retirement income will begin the day he;retires, 10 years from today, and he will then get 24 additional annual;payments. Inflation is expected to be 5;percent per year from today forward, he currently has $150,000 saved, and he;expects to earn a return on his savings of 7 percent per year, annual;compounding. To the nearest dollar, how;much must he save during each of the next 10 years (with deposits being made at;the end of each year) to meet his retirement goal?;a. $66,847.95 b. $77,201.21 c. $54,332.88 d. $41,987.33 e. $62,191.25;29. A rookie quarterback is in the process of negotiating his;first contract. The team?s general;manager has offered him three possible contracts. Each of the contracts lasts for four years.;All of the money is guaranteed and is paid at the end of each year. The payment terms of the contracts are listed;below;Year Contract 1 Contract 2;Contract 3;1 $1.5;million $1.0 million $3.5 million;2 1.5;million 1.5 million 0.5 million;3 1.5;million 2.0 million 0.5 million;4 1.5;million 2.5 million 0.5 million;The quarterback discounts all cash flows at 12;percent. Which of the three contracts;offers the most value?;a. Contract 1, its;present value is $4.56 million.;b. Contract;2, its present value is $5.10 million.;c. Contract;3, its present value is $4.20 million.;d. Either;Contract 2 or Contract 3, each provides a present value of $5.10 million.;e. Either;Contract 1 or Contract 2, each provides a present value of $5.10 million.

Paper#51266 | Written in 18-Jul-2015

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