1. If you purchase a car that costs $25,000 with a $7,000 down payment and the balance financed at an annual rate of 8.9% for 4 years with monthly payments, what will be the Interest portion of the second payment? Assume end-of-month payments. Also calculate the Effective Annual Rate for this loan.
2. a. If you invest $300 per month at the beginning of each month for the next 20 years into an account earning 5% annually, how much will you have in exactly 20 years?
b. If at the end of the ten years in part a above you increase your monthly payment to $450 per month, what will be the total value of the account after another ten years has gone by (i.e., at the end of 20 years)? How much of this total value represents the contributed principal, and how much is interest?
3. Assume that a $1,000 par value bond with a coupon rate of 6.5% (paid semi-annually) has 15 years to maturity.
a. If the current rate of interest on bonds like this is 5%, what will be the price of the bond? What is the price if current interest rates are instead 8%?
b. Assume that you buy the bond described above when interest rates are 5%. Five years later, you decided to sell the bond when current interest rates are still 5%. At what price will the bond be selling? Do the same assuming that you buy the bond when interest rates are 6%, and five years later they are still 6%.
c. Now assume that you purchase the bond in part a above when interest rates are 5%, and five years later interest rates are 9%. What will be the price of the bond?
d. What is the current yield and capital gains yield on this bond in part a if interest rates are 5%?
4. If a bond with 20 years to maturity and a coupon rate of 7.5% (paid annually) is selling for $895, what is the yield to maturity for this bond? Provide a brief description of what the term “yield to maturity” means.