Directions : Please answer all questions on a separate piece of paper. Show all

Question

Directions:  Please answer all questions on a separate piece of paper.  Show all work.  For any problems dealing with the time value of money, use of the tables (present and future values, lump sum and/or annuity) is an option you may employ for those problems which permit such use.
4. You have to make a balloon payment on your house five years from now of $15,000.  If money can earn an average of 6 percent a year for the five year period, how much will you have to place in the account today to have the $15,000 in five years? 5.  The rate that the bank is offering is 12 percent compounded monthly.  This is an effective annual rate of interest of what percent? 6.  Your employer gives you a stock bonus of $1,000 in your company at the beginning of each year.  You plan to retire in 20 years.  The stock has a growth rate of 15 percent per annum.  What will the value of your stock be in 20 years? 7.  Calculate the monthly payment on a $200,000 mortgage if payment is made at the beginning of each month and the annual interest rate is 12 percent for 30 years (Hint:  remember to treat this as an ordinary annuity).
Directions:  Please answer all questions on a separate piece of paper.  Show all work.  For any problems dealing with the time value of money, use of the tables (present and future values, lump sum and/or annuity) is an option you may employ for those problems which permit such use.
4. You have to make a balloon payment on your house five years from now of $15,000.  If money can earn an average of 6 percent a year for the five year period, how much will you have to place in the account today to have the $15,000 in five years? 5.  The rate that the bank is offering is 12 percent compounded monthly.  This is an effective annual rate of interest of what percent? 6.  Your employer gives you a stock bonus of $1,000 in your company at the beginning of each year.  You plan to retire in 20 years.  The stock has a growth rate of 15 percent per annum.  What will the value of your stock be in 20 years? 7.  Calculate the monthly payment on a $200,000 mortgage if payment is made at the beginning of each month and the annual interest rate is 12 percent for 30 years (Hint:  remember to treat this as an ordinary annuity).

Explanation / Answer

4. To get an amount of $ 15,000 after 5 years @ 6% per annum amount to be invested today is = 15000/(1.06)5

i.e, 15000/ 1.338226 = $ 11, 208.67

5. 12% compounded monthly to be credited per month = 12%/12 = 0.01.

so if the initial amount invested is $ 1 , this will become ( 1+0.01)12 which is 1.126825 after 1 year.

So the effective annual rate of interest will be 12.68 %

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