access “ consumer credit .” determine current interest rates charged B u s i n e s s F i n a n c e
WEEK 4 HOMEWORK: TEXTBOOK (100 PTS)
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There are three (3) types of textbook based homework items located at the end of each chapter. These include Discussion Questions (DQ), Exercises (E), and Problems (P). Some homework items have been custom created.
Complete the following from the textbook:
Chapter 9: E1, P2, P3, P4, P5, P7, P16, P17, P19
Exercises
1 Go to the Federal Reserve website,
2 Go to the Federal Reserve website,
3 Assume that your partner and you are in the consumer lending business. A customer, talking with your partner, is discussing the possibility of obtaining a $10,000 loan for three months. The potential borrower seems distressed and says he needs the loan by tomorrow or several of his relatively new appliances will be repossessed by the manufacturers. You overhear your partner saying that that in order to process the loan within one day there will be a $1,000 processing fee so that $11,000 in principal will have to be repaid in order to have $10,000 to spend now. Furthermore, because the money is needed now and is for only three months the interest charge will be 6 percent per month. What would you do? 1 Find the future value one year from now of a $7,000 investment at a 3 percent annual compound interest rate. Also, calculate the future value if the investment is made for two years. 2 Find the future value of $10,000 invested now after five years if the annual interest rate is 8 percent. 3 Determine the future values if $5,000 is invested in each of the following situations: 4 You are planning to invest $2,500 today for three years at a nominal interest rate of 9 percent with annual compounding. 5 Find the present value of $7,000 to be received one year from now, assuming a 3 percent annual discount interest rate. Also calculate the present value if the $7,000 is received after two years. 6 Determine the present values if $5,000 is received in the future (i.e., at the end of each indicated time period) in each of the following situations: 7 Determine the present value if $15,000 is to be received at the end of eight years and the discount rate is 9 percent. How would your answer change if you had to wait six years to receive the $15,000? 8 Determine the future value at the end of two years of an investment of $3,000 made now and an additional $3,000 made one year from now if the compound annual interest rate is 4 percent. 9 Assume you are planning to invest $5,000 each year for six years and will earn 10 percent per year. Determine the future value of this annuity if your first $5,000 is invested at the end of the first year. 10 Determine the present value now of an investment of $3,000 made one year from now and an additional $3,000 made two years from now if the annual discount rate is 4 percent. 11 What is the present value of a loan that calls for the payment of $500 per year for six years if the discount rate is 10 percent and the first payment will be made one year from now? How would your answer change if the $500 per year occurred for ten years? 12 Determine the annual payment on a $500,000, 12 percent business loan from a commercial bank that is to be amortized over a five-year period. 13 Determine the annual payment on a $15,000 loan that is to be amortized over a four-year period and carries a 10 percent interest rate. Also prepare a loan amortization schedule for this loan. 14 You are considering borrowing $150,000 to purchase a new home. 15 Assume a bank loan requires an interest payment of $85 per year and a principal payment of $1,000 at the end of the loan’s eight-year life. 16 Use a financial calculator or computer software program to answer the following questions: 17 Use a financial calculator or computer software program to answer the following questions: 18 Use a financial calculator or computer software program to answer the following questions: 19 Use a financial calculator or computer software program to answer the following questions. 20 Use a financial calculator or computer software program to answer the following questions. 21 What would be the present value of a $9,532 annuity for which the first payment will be made beginning one year from now, payments will last for 27 years, the annual interest rate is 13 percent, quarterly discounting occurs, and $2,383 is invested at the end of each quarter? 22 Answer the following questions. 23 You have recently seen a credit card advertisement stating that the annual percentage rate is 12 percent. If the credit card requires monthly payments, what is the effective annual rate of interest on the loan? 24 A credit card advertisement states that the annual percentage rate is 21 percent. If the credit card requires quarterly payments, what is the effective annual rate of interest on the loan? 25 Challenge Problem [Note: A computer spreadsheet software program or a financial calculator that can handle uneven cash flow streams will be needed to solve the following problems.] The following cash flow streams are expected to result from three investment opportunities.
Problems
Year
Investment Stable
Investment Declining
Investment Growing
1
$20,000
$35,000
$10,000
2
20,000
30,000
15,000
3
20,000
20,000
20,000
4
20,000
5,000
30,000
5
20,000
0
50,000
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