Question

1. Charlie bought his house 15 years ago, he is borrowed $200,000 with a 30-year mortgage with a 6.0% APR. His mortgage broker has offered him a 15-year mortgage with a 4¾% APR with 3 points closing costs. Should Charlie refinance if he plans to live in the house for 10 more years?

21. Suzie owns a municipal bond that pays 5% interest annually and her average tax rate is 23% and his marginal tax rate is 40%. What is the taxable equivalent yield on her bond?

22. Hillary and Bill have taxable income of $370,000 and 425,000, respectively. What will their tax liability be if they file jointly? Use the tax rate schedules on the back of this exam. What is Hillary and Bill’s marginal tax rate?

23. Garth has $10,000 to invest for retirement, how much money will he have after 20 years if he buys a CD that earns 6% compounded annually?

24. Barry plans to invest $500 monthly for the next 30 years, how much money will he have in his account after 30 years if he purchases an investment that earns 10% compounded monthly?

Bonus: (10 points): What would Hillary and Bill’s (problem 22) tax liability be if they filed separately?

Answer 1

1) For a $200,000 loan for 30 years at 6%, Monthly Installment = $1199.10 { use Excel function PMT(0.06/12,360,200000) to get monthly installment }

After 15 years, Remaining Loan = 200,000*(1+0.06/12)^(15*12) - FV (0.06/12,180,1199.10) = $142,097.99

For a $142,097.99 loan for 15 years at 4.75%, Monthly Installment = $1105.28 { use Excel function PMT(0.0475/12,180,142097.99) to get monthly installment }

Per month Saving on Monhtly installment = 1199.10 - 1105.28 = $93.82

Total Savings for 10 years on Monthly installment = 93.82*12*10 = $11258.40

Closing Costs = $6000

Since Savings are greater than Closing costs, hence he should refinance the laon.

2) 5%*(1-0.23)= 3.85%

3) Tax rate not availabale for Hillary & Bill

4) 10,000*(1.06)^20 = $32071.35

5) Use FV function of excel

FV(0.1/12,360,500) = $1130243.96