Problem 1) Calculate the future value of $2000 in
a) 5 years at interest rate of 5% per year
b) 10 years at an interest rate of 5% per year
c) 5 years at an interest rate of 10% per year
d) why is the amount of interest earned in part (a) less than half the amount of interest earned in (b)
Problem 2) You are thinking of retiring. Your retirement plan will either pay you $250000 immediately on retirement or $350000 five years after date of retirement. Which alternative should you choose if interest rate is;
- 0% per year
- 8% per year
- 20% per year
Problem 3) you have been offered a unique investment opportunity. If you invest $10,000 today you will receive $500 one year from now; $1500 two years from now and $10,000 ten years from now
- what is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity?
- what is the NPV of the opportunity if the interest rate is 2% per year? Should you take the opportunity?
Problem 4) What is the present value of $1000 paid at the end of each of the next 100 years if interest rate is 7% per year?
Problem 5) You have found 3 investment choices for a one year deposit
10% APR compounded monthly
10% APR compounded annually
9% APR compounded daily
Compute the EAR for each investment with 365 days in the year
Problem 6) Key Bank is offering a 30 year mortgage with an EAR of 5 and 3/8%. If I borrow $ 150,000 what will be my monthly payment?
Problem 7) If the rate of inflation is 5% what nominal interest rate is necessary for you to earn a 3% real interest rate on your investment
Problem 8) your best taxable investment has an EAR of 4%. Your best tax-free investment opportunity has an EAR of 3%. If your tax rate is 30%, which opportunity provides the higher after-tax interest rate?