Question

Q 1 answer the problem A-F

a

You have $100 to invest. You can buy a 3 year CD that pays 7% interest a year.

What is the vaue of the CD at the end of the 3 years

b

You want to put money in the stock market todayto pay for your child's college costs.

She will be going to to college in 18 years and you want to have $250,000

saved by then. You expect to earn 8% in the market.

How much do you need to invest now?

c

Suppose that you have $1,250 today and you would like to know how long

it will take you double your money to $2,500. Assume that you can earn 8% per year.

d

I take a new 30 year mortgage out for $315,000 and my monthly payment is $1500.

What is the annual interest rate I am paying (Hint: multiply the monthly interest by 12)

e

Suppose that you are offered an investment that will pay you $1,000 per year for 10 years.

If you can earn a rate of 9% per year on similar investments, how much would you pay for the investment

f

You want to save for your daughter's college education. You want to save

a fixed amount each year for this expense. You expect to

earn 6% on this investment. How much do you have to save each

month in order to have $250,000 in 18 years?

Answer 1

a) FV = PV x (1 + r)^n = 100 x (1 + 7%)^3 = $122.50

b) PV = FV / (1 + r)^n = 250,000 / (1 + 8%)^18 = $62,562.26

c) FV = PV x (1 + r)^n => 2,500 = 1,250 x (1 + 8%)^n

=> n = LN(2) / LN(1.08) = 9 years

d) Monthly rate can be calculated using I/Y function

N = 30 x 12 = 360, PV = -315000, FV = 0, PMT = 1500

=> Compute I/Y = 0.33%

=> Annualized YTM = 3.98%

e) N = 10, PMT = 1000, I/Y = 9%, FV = 0

=> Compute PV = $6,417.66

f) N = 18, PV = 0, FV = 250000, I/Y = 6%

=> Compute PMT = $8,089.14