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MID TERM REVIEW QUESTIONS Fall 2014 FNCE 3333

Q1) Tom makes a deposit of $6000 in the bank. How much will he have at the end 5 years if
a) The interest rate is 8% per annum
6000(1.08)^5=$8815.97
b) The interest rate is 7 % compounded semi-annually
6000(1.035)^10=$8463.59

Q2) a real estate investment is expected to pay $2000 at the end of every year for the next 10
years. Tom believe earning a 10% return annually on the investment is fair. How much do you think
he should pay for such an investment?
PV of Annuity = -2000(1/0.1-1/(0.1(1.1)^10)) = -$12,289.80
Q3) Calculate the effective annual Interest rates for the following rates:
a) A 6% annual nominal rate compounded yearly
(1.06^1)-1=6%
b) A 6% annual nominal rate compounded semi-annually
(1.03^2)-1=6.09%
c) A 6% annual nominal rate compound monthly
(1.005^12)-1=6.17%
Q4) A real estate company is considering to buy a property on Farmington Avenue that will cost
$100,000. It estimates the property will generate a yearly income of 12000 for the next 20 years
before it sells at the same price it bought the property for i,e 100,000?
a) What is the annual internal rate of return ?
IRR=12%
b) The company wants to examine the possibility of selling the property after 10 year. It
estimates the selling price would be 95,000 and the yearly income would remain the same.
What is the internal rate of return in this case?
IRR=11.71%
c) What option should the company choose and why?
It should choose the first option because it will generate a higher internal rate of return.
Q5) John is considering buying a lot that will he assumes will sell for 13,000 at the end of 5 years. He
believes he should earn a 10% investment yield compounded annually. How much should he pay for
the lot?
PMT=0, FV=13000, I/Y=10%, N=5 He should pay $8071.98
Q6) Brenda obtains a fully amortizing CPM loan of 50,000 from the bank, for a period of 1 year. The
nominal interest rate is 12% per annum.

a) What is her monthly installment?


N=12, I/Y=1%, FV=0, PV=50,000; PMT=-4,442.44
b) What is the amount of principle and interest she pays in the 2nd month?
First month interest = 500; First month amortization = 4,442.44-500 = 3,942.44
Second month balance = 50,000-3,942.44=46057.56*0.01=$460.58 in interest
$4,442.44-$460.58=$3981.86 in principal
c) The total interest and principle paid over the loan
4,442.44*12=53309.28-50,000 =$3,309.28 in interest over the course of the loan
d) The Bank allows Brenda to make a balloon payment at the end of the year worth 20,000.
What is her monthly installment now?
N=12, I/Y=1%, FV=-20,000, PV=50,000; PMT=$2,865.46

Q7) Desiring a low monthly payment for his car loan after graduation. Mark agrees to a loan that will
provide 10,000 for a 3 year period at 15% nominal interest rate p.a , but mark will need to pay 11,000
at the end of the three year period.
a) What is marks monthly payment?
PV=10,000, N=36, I/Y=15%/12, FV=-11,000; PMT=$102.83
b) What type of a loan is this?
Negative amortizing
c) What is the amount of principle and interest paid in the 2nd month?
First month interest = 10,000*0.0125=125; First month amortization=102.83-125=-22.17
Second month balance=10,000-(-22.17)=10,022.17; Second month
interest=10,022.17*0.0125=$125.28, second month principle = 102.83-125.28=-$22.45
d) What is the amount of principle and interest paid over the period of the loan?
Principal = $10,000; Interest = 102.83*36+1,000=$4,701.88
Q8) A 50,000 mortgage loan is made out for a period of 20 years at 4% p.a with payments due
monthly. The loan is CPM in nature.
a) What will be the loan balance after 5 years ?
FV=0, N=240, I/Y=0.3333%, PV=50,000; PMT=302.99
PV60 (FV=0, I/Y=0.3333%, PMT=-302.99, N=180)=$40,962.00
b) Assume the lender charges 4 pts to close the loan. What would be the APR.
I/Y(PV=48,000, PMT=-302.99, N=240, FV=0)=4.4737%

Q9) An ARM loan of 120,000 is made out with an initial interest rate of 6% per annum for 20 years. At
the end of the first year owing to higher inflation the interest rate changes to 8%. No more changes to
interest rate takes place .
a) What is the original payment and the payment from 2nd year?
OG = 859.72; FV12 (PV=120,000, I/Y=0.5%, N=12, PMT=859.72)= -116,796.21

PMT13 (PV=116,796.21, I/Y=.66667%, N=228, FV=0)=$998.03


b) How much interest and Principle has been paid in year 1, from year 2 to 20 and over the 20
year loan period?
Year 1 Principal = 120,000-116,796.21=$3,203.80
Year 1 Interest = 859.72(12)-3,203.8=$7,112.84
Years 2-20 Principal = $116,796.21
Years 2-20 Interest = 998.03(228)-116,796.21=$110,754.63
Q10) A 4/1 hybrid loan is made out to john. The loan is worth 80,000 and is for 10 years. The initial
interest rate is 6% per annum. The interest rate moves up by 6% to 12% after the FDR period and no
more changes are recorded. Calculate the two different payments john has to make?
Old PMT(PV=80,000, FV=0, I/Y=0.5%, N=120)=$888.16
PV48(FV=0, I/Y=0.5%, N=72, PMT=888.16)=$53,591.39
New PMT(FV=0, I/Y=1%, N=72, PV=53591.39)=$1,047.72