1. Mr. and Mrs. Holm’s property taxes of $2 250 are due in 9 months. The City will give a $77 discount if the full amount is paid now. Which alternative works out best for the Holms if they can earn 6% compounded monthly on some short-term investment – paying the taxes now or on the due date? Show calculations supporting your answer.
2. A loan contract requires a payment after 2 years of $1 500 plus interest at 8% compounded quarterly, and a second payment after 4 years of $2 500 plus interest at 8% compounded quarterly. What would you pay to purchase this contract 18 months after the issue date if you require a yield of 10.5% compounded semi-annually? (hint: think of the two payments as separate interest-bearing notes)