# You have saved \$4,000 for a down payment on a new car. The largest monthly payment you can…

Question 1

PRESENT VALUE AND LOAN ELIGIBILITY

You have saved \$4,000 for a down payment on a new car. The largest monthly payment you can afford is \$350. The loan will have a 12% annual interest based on end-of-month payments.

What is the most expensive car you can afford if you finance it for 48 months? for 60 months?
Question 2

EFFECTIVE VERSUS NOMINAL INTEREST RATES

Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily.
a. Based on the EIR or EAR which bank should you use?
b. Could your choice of banks be influenced by the fact that you might want to withdraw your
funds during the year as opposed to at the end of the year? Assume that your funds must be
left on deposit during an entire compounding period in order to receive any interest.

Question 3
NOMINAL INTEREST RATE AND EXTENDING CREDIT

As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly. To carry receivables, you must borrow funds from your bank at a nominal 6%, monthly compounding. To offset your overhead, you want to charge your customers an EIR that is 2% more than the bank is charging you.

What annual interest rate should you change your customers?

Question 4
FV OF UNEVEN CASH FLOW

You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save \$5,000 at the end of the first year, and you anticipate that your annual savings will increase by 10% annually thereafter. Your expected annual return is 7%.

How much will you have for a down payment at the end of Year 3?

Question 5

AMORTIZATION SCHEDULE
a. Set up an amortization schedule for a \$25,000 loan to be repaid in equal installments of

\$ 9 680.16 at the end of each of the next 3 years. The interest rate is 10% compounded annually.
b. What percentage of the payment represents interest and what percentage represents
principal for each of the 3 years? Why do these percentages change over time?

Question 6

REQUIRED ANNUITY PAYMENTS

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as \$40,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 5%. He currently has \$100,000 saved, and he expects to earn 8% annually on his savings.

How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal?