Question

# You are considering making a loan at the bank. You will borrow \$10,000 from the bank...

You are considering making a loan at the bank. You will borrow \$10,000 from the bank today. The interest rate on the loan is 5 percent nominal compounded annually. You will completely pay off the loan with two equal payments. The first payment is due one year from today, and the second payment is due two years from today. Your loan payments will be \$5378.05 each. How much will your loan balance be after you make the first payment?

• A. \$4,878.05
• B. \$4,621.95
• C. \$10,000.00
• D. \$5,121.95
• E. Something Else

You are considering making an investment that promises to pay you \$600 per year, each year forever. You will receive the first payment five minutes after you purchase the investment. You require a 9 percent return on this type of investment. What should you be willing to pay to purchase this investment today?

• A. \$6,666.67
• B. \$7,266.67
• C. 666.67
• D. \$7,920.67
• E. Something Else

Suppose we are considering the purchase of a bond. The bond has 11 years to maturity and has a 12 percent annual coupon rate. Coupon payments are paid annually, and the first coupon payment will be received one year from today. The bond has a \$1,000 face value and has a current price of \$975. What is the Yield to maturity on this bond?

• A. 12.42%
• B. 11.83%
• C. 12.00%
• D. 11.00
• E. It is not possible to solve this problem as the calculator gives an error.

You are considering the purchase of a bond. The bond has a \$1,000 face value. The bond has 7 years to maturity and the bond has a 10 percent annual coupon rate. Coupon payments are made annually and the first coupon payment will be made one year from today. You require an 8 percent annual rate of return on this investment. Using the methods we discussed in class, how much should you be willing to pay to buy this bond?

• A. \$1,000.00
• B. \$1,104.13
• C. \$2,000.00
• D. \$2,104.13
• E. Something Else

Given,

Borrowed amount = \$10000

Interest rate = 5%

Annual repayment = \$5378.05

Solution :-

Interest amount in first year = Borrowed amount x interest rate

= \$10000 x 5% = \$500

Principal amount in first year repayment = Annual repayment - interest amount in first year

= \$5378.05 - \$500 = \$4878.05

Now,

Loan balance after one year = Borrowed amount - principal amount in first year payment

= \$10000 - \$4878.05 = \$5121.95

Thus, your loan balance will be \$5121.95 after you make the first payment.

Option 'D' is correct.

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