1. (TCO 3) You have been approved for a $70,000 loan toward the purchase of a ne
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1. (TCO 3) You have been approved for a $70,000 loan toward the purchase of a new home at 10% interest. The mortgage is for 30 years. How much are the approximately annual payments of the loan? Hint: Assume you pay yearly. (Points : 3) $7425 $8690 $5740 None of the above 2. (TCO 3) First Choice Bank pays 9% APR compounded quarterly on its business loans. National Emerald Bank pays 16% APR compounded daily. The EAR for First Choice and National Emerald Bank are: (Points : 3) 9.31% and 17.35%, respectively 9% and 17.50%, respectively 9.31% and 17.50%, respectively 9% and 17.35%, respectively 3. (TCO 3) ABC Electronics is considering an investment that will have cash flows of $16,000, $5,000 and $4,000 for years 1 through 3. What is the approximate value of this investment today if the appropriate discount rate is 9% per year? (Points : 3) $23,250 $27,250 $21,970 None of the above 4. (TCO 3) You deposited $8,000 in your bank account today. An increase in which of the following will increase the future value of your deposit assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all answers that apply: (Points : 4) interest rate initial amount of your deposit frequency of the interest payments None of the above will increase the value of the investment 5. (TCO 3) If you borrow $50,000 today at 10% interest for eight years. How much of your first payment will be applied towards the principal of the loan? (Points : 3) $5,000 $4,372 $4,790 zero, all will be applied towards the interest 6. (TCO 3) Match the following terms with the examples as appropriate: (Points : 4) Potential Matches: 1 : You obtained a business loan for four months. The loan will allow you to paid $300 in interest for three months and a final payment of interest and principal at the end of the four month. 2 : You obtained a mortgage to buy a home. You will pay $800 per month to cover both interest and principal. 3 : a way used by the US government to borrow money on short-term basis. 4 : You borrow $1,000 from your best friend. In return, you will give him back $1150 in 3 months. Answer : Pure discount loan : Amortized Loan : Interest-only Loan : Treasury Bill 7. (TCO 3) You are interested in saving to buy a new machine that costs $387,120. You can deposit $32,805 in your bank today. If your bank pays 14% annual interest on its accounts, how long will it take you to save for the new machine? (Points : 4) about 19 years about 5 years about 12 years Can not be determinedExplanation / Answer
1. You have been approved for a $70,000 loan toward the purchase of a new home at 15% interest. The mortgage is for 30 years. How much are the approximately annual payments of the loan? Hint: Assume you pay yearly. (Points : 3) ANnual Paments = PMT(15%,30,-70000) = $10,661 Ans : None of the above 2. (TCO 3) First Choice Bank pays 9% APR compounded quarterly on its business loans. National Emerald Bank pays 19% APR compounded semiannually. The EAR for First Choice and National Emerald Bank are: (Points : 3) EAR = (1+APR/m)^m - 1 So for FCB, EAR = (1+9%/4)^4 -1 = 9.31% NEB, EAR = (1+19%/2)^2 -1 = 19.90% Ans : 9.31% and 19.90%, respectively 3. (TCO 3) ABC Electronics is considering an investment that will have cash flows of $16,000, $5,000 and $4,000 for years 1 through 3. What is the approximate value of this investment today if the appropriate discount rate is 9% per year? (Points : 3) PV of CF = 16000/(1+9%)^1 + 5000/(1+9%)^2 + 4000/(1+9%)^3 = $21,976.03 Ans : $21,970 closest answer 4. (TCO 3) You deposited $3,000 in your bank account today. An increase in which of the following will increase the future value of your deposit assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all answers that apply: (Points : 4) interest rate frequency of the interest payments length of the investment period 5. (TCO 3) If you borrow $50,000 today at 10% interest for eight years. How much of your second payment will be applied to interest? (Points : 3) Annual PMT = PMT(10%,8,-50000) = $9372 In 1st Yr, Int will be 10%*50000 = 5000. So principal is 9372-5000=4372. So Principal for 2nd Yr is 50000-4372 = 45,628 So 2nd Yr Int = 10%*45628 = 4562.80 Ans : $4,562 6. (TCO 3) Match the following terms with the examples as appropriate: (Points : 4) Answer Potential Matches: 4: Pure discount loan 2: Amortized Loan 1: Interest-only Loan 3: Treasury Bill 7. (TCO 3) You are interested in saving to buy a new machine that costs $3,700. You can deposit $1,941 in your bank today. If your bank pays 5% annual interest on its accounts, how long will it take you to save for the new machine? (Points : 4) We have nper = nper(Rate,PV,FV) = nper(5%,-1941,3700) = 2.05 yrs Ans :about 2 years 8. (TCO 3) How can we apply the concept of time value of money in evaluating a mortgage? (Points : 6) Time value of money is a Relationship determined by the mathematics of compound interest between the value of a sum of money at one point in time and its value at another point in time. Time value of money can be illustrated by the fact that a dollar received today is worth more than a dollar received a year from now because today’s dollar can be invested and earn interest as the year elapses. Implicit in any consideration of time value of money are the rate of interest and the period of compounding. For example, the present value of $1 million received 10 years from now is only $386,000 today, assuming a 10% rate of interest and annual compounding. Insurance companies make use of time value of money by earning investment income on premiums between the time of receipt and the time of payment of claims or benefits.
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