##### Fin515 – week 2 – problem set

**Week 2 Downside Set**

**Reply the next questions and remedy the next issues within the house offered. When you find yourself accomplished, save the file within the format flastname_Week_2_Problem_Set.docx, the place flastname is your first preliminary and also you final title, and submit it to the suitable dropbox.**

**Chapter four (pages 132–136):**

**three.** Calculate the longer term worth of $2000 in

a. 5 years at an rate of interest of 5% per yr;

b. ten years at an rate of interest of 5% per yr; and

c. 5 years at an rate of interest of 10% per yr.

d. Why is the quantity of curiosity earned partly (a) lower than half the quantity of curiosity earned partly (b)?

**four. **What's the current worth of $10,000 obtained

a. twelve years from immediately when the rate of interest is four% per yr;

b. twenty years from immediately when the rate of interest is eight% per yr; and

c. six years from immediately when the rate of interest is 2% per yr?

**5. **Your brother has supplied to present you both $5,000 immediately or $10,000 in 10 years. If the rate of interest is 7% per yr, which choice is preferable?

**6. **Take into account the next options.

i. $100 obtained in 1 yr

ii. $200 obtained in 5 years

iii. $300 obtained in 10 years

a. Rank the options from most respected to least helpful if the rate of interest is 10% per yr.

b. What's your rating if the rate of interest is barely 5% per yr?

c. What's your rating if the rate of interest is 20% per yr?

** **

**eight. **Your daughter is presently eight years outdated. You anticipate that she will likely be going to varsity in 10 years. You want to have $100,000 in a financial savings account to fund her training at the moment. If the account guarantees to pay a hard and fast rate of interest of three% per yr, how a lot cash do it's worthwhile to put into the account immediately to make sure that you should have $100,000 in 10 years?

**9. **You might be pondering of retiring. Your retirement plan pays you both $250,000 instantly on retirement or $350,000 5 years after the date of your retirement. Which various must you select if the rate of interest is

a. zero% per yr;

b. eight% per yr; and

c. 20% per yr?

**14. **You could have been supplied a singular funding alternative. Should you make investments $10,000 immediately, you'll obtain $500 1 yr from now, $1,500 2 years from now, and $10,000 10 years from now.

a. What's the NPV of the chance if the rate of interest is 6% per yr? Must you take the chance?

b. What's the NPV of the chance if the rate of interest is 2% per yr? Must you take it now?

**36. **You might be pondering of buying a home. The home prices $350,000. You could have $50,000 in money that you should utilize as a down cost on the home, however it's worthwhile to borrow the remainder of the acquisition value. The financial institution is providing a 30-year mortgage that requires annual funds and has an rate of interest of seven% per yr. What's going to your annual cost be for those who join this mortgage?

**37. **You want to purchase the home and take the mortgage described in Downside 36. You'll be able to afford to pay solely $23,500 per yr. The financial institution agrees to assist you to pay this quantity every year, but nonetheless borrow $300,000. On the finish of the mortgage (in 30 years), you have to make a *balloon* cost; that's, you have to repay the remaining steadiness on the mortgage. How a lot will this balloon cost be?

** **

**38. **You could have simply made a suggestion on a brand new house and are in search of a mortgage. You'll want to borrow $600,000.

a. The financial institution affords a 30-year mortgage with mounted month-to-month funds and an rate of interest of zero.5% monthly. What's the quantity of your month-to-month cost for those who take this mortgage?

b. Alternatively, you will get a 15-year mortgage with mounted month-to-month funds and an rate of interest of zero.four% monthly. How a lot would your month-to-month funds be for those who take this mortgage as an alternative?

***A.1. This downside is from the Appendix to Chapter four.**

Your grandmother purchased an annuity from Rock Stable Life Insurance coverage Firm for $200,000 when she retired. In change for the $200,000, Rock Stable pays her $25,000 per yr till she dies. The rate of interest is 5%. How lengthy should she reside after the day she retired to return out forward (that's, to get extra in *worth* than what she paid in)?

High of Kind