FIN 260 Assignment 2

FIN 260

Assignment 2

1. First City Bank pays 7% simple interest on its savings account balances, whereas Second City Bank pays 7% compounded annually. If you made a $6,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 9 years?

2. At 6.5 percent interest, how long does it take to quadruple your money?

3. You are scheduled to receive $15,000in two years. When you receive it, you will invest it for six more years at 7.1 percent per year. How much will you have in eight years?

4. Investment X offers to pay you $5,200 per year for eight years, whereas investment Y offers to pay you $7,300 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent?

5. First National Bank charges 13.2 percent compounded monthly on its business loans. First United Bank charges 13.5 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?

6. You want to have $75,000 in your savings account 12 years from now, and you are prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.8 percent interest, what amount must you deposit each year?

7. What is the future value of $2,600 in 19 years assuming an interest rate of 7.9 percent compounded semiannually?

8. You want to buy a new sports coupe for $83,500, and the finance office at the dealership has quoted you 6.5 percent APR loan for 60 months to buy the new car. What will your monthly payments be?

9. First Simple Bank pays 9 percent simple interest on its investments accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10 years?

10. You've just joined the investment-banking firm of JP Morgan. They've offered you two different salary arrangements. You can have $75,000 per year for the next two years, or you can have $64,000 per year for the next two years, along with a $20,000 signing bonus today. If the interest rate is 10% compounded monthly, which do you prefer?

11. You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 30 years, which will increase 3 percent per year. If the appropriate discount rate is 7 percent, what is the present value of your winnings? (Hint: think of the annuity types i.e. growing annuity, perpetuity etc.)

12. You are prepared to make monthly payments of $ 290, beginning at the end of this month, into an account that pays 7 percent interest compounded monthly. How many payments will you have made when your account balance reaches $20,000?