1. You are planning to make monthly deposits of $130 into a retirement account t

Question

1. You are planning to make monthly deposits of $130 into a retirement account that pays 10 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 26 years?

A. $192,183.65

B. $201,792.83

C. $182,574.47

D. $2,306,203.80

E. $170,323.55

2. Dinero Bank offers you a $27,000, 10-year term loan at 7 percent annual interest.

A. $5,530.95

B. $4,023.80

C. $3,668.43

D. $3,844.19

E. $4,113.29

You need a 20-year, fixed-rate mortgage to buy a new home for $210,000. Your mortgage bank will lend you the money at a 6.6 percent APR for this 240-month loan. However, you can afford monthly payments of only $850, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment.

Required:

How large will this balloon payment have to be for you to keep your monthly payments at $850?

A. $83,774.36

B. $361,385.74

C. $350,544.17

D. $96,888.68

E. $375,841.17

2. Dinero Bank offers you a $27,000, 10-year term loan at 7 percent annual interest.

Explanation / Answer

Part A)

The future value after 26 years can be calculated with the use of Future Value (FV) formula/function of EXCEL/Financial Calculator. The function/formula for FV is FV(Rate,Nper,PMT,PV) where Rate = Interest Rate, Nper = Period, PMT = Payment and PV = Present Value (if any).

______

Here, Rate = 10%/12, Nper = 26*12 = 312, PMT = $130 and PV = 0 [we use 12 since the compounding is monthly]

Using these values in the above function/formula for FV, we get,

Future Value after 26 Years = FV(10%/12,312,130,0) = $192,183.65 (which is Option A)

______

Part B)

The annual loan payment can be calculated with the use of Payment (PMT) function/formula of EXCEL/Financial Calculator. The function/formula for PMT is PMT(Rate,Nper,PV,FV) where Rate = Interest Rate, Nper = Period, PV = Present Value, FV = Future Value (if any).

______

Here, Rate = 7%, Nper = 10, PV = $27,000 and FV = 0

Using these values in the above function/formula for PMT, we get,

Annual Payment = PMT(7%,10,27000,0) = $3,844.19 (which is Option D)

______

Part C)

Step 1: Calculate Present Value of Monthly Payments and Remaining Principal

The present value can be calculated with the use of Present Value (PV) function/formula of EXCEL/Financial Calculator. The function/formula for PV is PV(Rate,Nper,PMT,FV) where Rate = Interest Rate, Nper = Period, PMT = Monthly Payment and FV = Future Value (if any).

Here, Rate = 6.6%/12, Nper = 240, PMT = $850 and FV = 0

Using these values in the above function/formula for PV, we get,

Present Value of Monthly Payments = PV(6.6%/12,240,850,0) = $113,111.32

Remaining Principal = 210,000 - 113,111.32 = $96,888.68

______

Step 2: Calculate Balloon Payment

The balloon payment can be calculated with the use of Future Value formula as follows:

Balloon Payment (Future Value) = Remaining Principal*(1+Rate/12)^Period = 96,888.68*(1+6.6%/12)^240 = $361,385.74 (which is Option B)

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