Problems

1. A credit union has issued a 3-year loan of $ 5000. Simple interest is charged at a rate of 10 percent per year. The principal plus interest is to be repaid at the end of third year. Compute the interest for the 3-year period. What amount will be repaid at the end of the third year? 2. A person loans $10,000 to a corporation purchasing a bond from the corporation. Simple interest is computed quarterly at a rate of 3 percent per quarter, and a final check includes the original principal plus interest earned during the last quarter. Compute the interest earned each quarter and the total interest which will be earned over the 5-year life of the bonds 3. A woman has purchased $150,000 worth of corporate bonds. The bond expires in 20 years and simple interest is computed semiannually at a rate of 7 percent and 6-month period. Interest checks are mailed to bondholders every 6 month. Determine the interest the woman can expect to earn every 6 months. How much interest can she expect over the 20-year period? 4. A long term investment of $250,000 has been made by a small company. The interest rate is 12 percent per year, and interest is compounded quarterly . If all interest is reinvested at the same rate of interest, what will the value of the investment be after 8 years? 5. A young man has recently received an inheritance of $ 200,000. He wants to take portion of his inheritance and invest it for his later years. His goal is to accumulate $300,000 in 15 years. How much of the inheritance should be invested if the money will earn 12 percent per year compounded semiannually ? How much interest will be earned over the 15 years? 6. The board of regents of a southern state is planning the future college level needs for the state. They have observed that the number of students attending state-operated schools-junior colleges, 4-year schools, and the state university- has been increasing at the rate of 7 percent per year. There are currently 80000 students enrolled in various schools. Assuming continued growth at same rate, how long will it take for enrollments to reach 200000 students? 7. The nominal interest rate on an investment is 14% per year. Determine the effective annual interest rate if (a)interest is compounded semiannually (b) interest is compounded quarterly 8. If $400,000 is to grow to $750000 over a period of 10 year period , at what annual rate of interest it must be invested , given that the interest is compounded semi-annually 9. A corporation wants establish a sinking fund at the end of this year. Annual deposits will be made at the end of this year and for the following 9 years. If deposits earn interest at the rate of 8 percent per year compounded annually, how much money must be deposited each year in order to have $ 12 million at the time of 10th deposit? How much interest will be earned? 10. Parents of a teenage girl want to deposit a sum of money which will earn interest at the rate of 9 percent per year compounded semiannually. The deposit will be used to generate a series of eight semiannual payments of $2500 beginning 6 months after the deposit. This payments would help finance daughter’s college education. What amount must be deposited to achieve their goal? How much interest will be earned on this deposit? 11. An employee has contributed with her employer to a retirement plan.At the date of her retirement, the total retirement benefits are $250,000. The retirement program provides for investment of this sum at an interest rate of 12 percent per year compounded semi-annually. Semi-annual disbursements will be made 30 years, or in the event of his death, to her heirs. What semiannual payments should be generated? How much interest will be earned on $ 250,000 over the 30 years

12. A person pays $ 100,000 in a new house. A down payment of $ 30,000 leaves a mortgage of $ 70,000 with interest compounded at 10.5 percent per year compounded monthly. Determine the monthly mortgage payment if the loan is to paid for (a) 20 years (b) 25 years (c) 30 years. Compute total interest under the three different loan periods. 13. A couple estimates that they can afford monthly mortgage of $750. Current mortgage interest rates are 10.25 percent. If 30 year mortgage is obtainable, what is the maximum mortgage loan they can afford? 14. Consider the cash flow pattern given in the pattern as illustrated. For this investment project , a $ 1 million investment results no cash flow in the first year. However , at the end of the following 5 years the investment results in positive net returns These returns are not linked to one another, increasing to a maximum of $450,000 at the end of fourth year decreasing finally to $100,000 at the end of sixth year. Suppose that the minimum desirability of the project is 12 percent. Find the NPV. Times in years Return 0 -$1000000 1 0 2 $3500000 3 $400,000 4 $450,000 5 $275000 6 $100,000 15. The XYZ Corporation is considering three alternative investments characterized by the data shown in thee accompanying table. Note that the three investments hence equal initial cash outlays, equal if times, and equal dollars Note that the pattern of returns are different for three investments. Alternatives 1 2

3

Initial Investment $380,000 $380,000 $380,000 Cash inflows Year 1 $180,000 $220,000 $140,000 Year 2 $180,000 $180,000 $180,000 Year 3 $180,000 $140,000 $220,000 Total cash inflows $540,000 $540,000 $540,000 a. XYZ has a minimum desired rate of return on investment of 15 percent. Determine the NPV of each of these investments and determine which meet the rate of return criteria b. Use linear interpolation to estimate the actual rate of return for the three investment alternatives 16. What is the present value of an income stream which provides Rs 2000 an year for the first five years and Rs 3000 an forever thereafter, if the discount rate is 10%

17. A person requires Rs 20,000 at the beginning of the year from 2011 to 2015. How much should he deposit at the end of each year from 2001 to 2006? The interest rate is 12%