1.You have credit card debt of $25,000 that has an APR (monthly compounding) of 15%. Each month you pay the minimum monthly payment only. You are required to pay only the outstanding interest. You have received an offer in the mail for an otherwise identical credit card with an APR of 12%. After considering all your alternatives, you decide to switch cards, roll over the outstanding balance on the old card into the new card, and borrow additional money as well. How much can you borrow today on the new card without changing the minimum monthly payment you will be required to pay?
2.In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the United States. What was the real interest rate in 1975? How would the purchasing power of your savings have changed over the year?
3.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?
4.Can the nominal interest rate available to an investor be significantly negative? (Hint: Consider the interest rate earned from saving cash “under the mattress.”) Can the real interest rate be negative? Explain.
5.Consider a project that requires an initial investment of $100,000 and will produce a single cash flow of $150,000 in five years.
a. What is the NPV of this project if the five-year interest rate is 5% (EAR)?
b. What is the NPV of this project if the five-year interest rate is 10% (EAR)?
c. What is the highest five-year interest rate such that this project is still profitable?