Log in
Finance
1
answer
0
watching
106
views
2 Feb 2019

Robert is repaying a debt with 20 annual payments of 900 dollars each, the first coming a year from now. At the end of the 4th year, he makes an extra payment of 1800 dollars. He then shortens his remaining payment period by 2 years, and makes level payments over the remaining time. If the effective rate of interest is 8.3 percent, how large is his new annual payment?

Watch
1
answer
0
watching
106
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Casey Durgan
Casey DurganLv2
4 Feb 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

Catfish Hunter’s 1974 baseball contract with the Oakland Athletics called for half of his $100,000 salary to be paid to a life insurance company of his choice for the purchase of a deferred annuity. More precisely, there were to be semimonthly contributions in Hunter’s name to the Jefferson Insurance Company with the first payment on April 16 and the final payment on September 30. We suppose that the first eleven of these were to be for $4,166.67, and the final payment was to be for four cents less. (12 x $4;166:67 = $50;000.04)

a) Using an annual effective interest rate of 6% (a rate that figures in a sixyear personal loan of $120,000 that Oakland’s owner Charlie Finley had made to Hunter in 1969 and then promptly recalled), find the value of the specified payments to the insurance company at the scheduled time of the last payment. (Hunter wished to have such an annuity in lieu of immediate salary for tax reasons. Finley claimed that he was fulfilling thecontract when he offered Hunter a $50,000 check at the end of the season. Finley’s default on his contractual obligation led to Hunter’s historic free agency. The New York Yankees signed Hunter to a five-year, $3,750,000 contract.)

b) Suppose that the contracted payments had been made to the insurance company from April 16, 1974 through September 30, 1974, and that they accumulated at an annual effective interest rate of 6%. Further suppose that Hunter had drawn a level January 1st salary for twenty years, beginning on January 1, 1980, the first January after his retirement. Find the amount of the annual salary payments. (Hunter died on September 9, 1999, so he would not have received a January 1, 2000 annuity payment.)

The answer for part a is $50,673.92 and part b is $5,659.45 I just don't know how to go about solving the problem.

Required: For each of the following questions please use the Future/Present Value tables in the text showing your calculations. Do not use excel, please show formulas and full calculations.

-The Andrew Company has decided to issue a 10 year, 7%, $3,000,000 term bond on June 1, 2017, paying annual interest with the first interest payment due June 1, 2018. At the time the market rate for similar bonds is 7%. You have been asked to establish the selling price of the bond.

-Jake is saving for his college education. He decides to deposit $18,000 at the end of each year for a 7 year period earning an annual interest rate of 9% per year. He will need $155,000 for his tuition when he begins school in 7 years. Will he have enough? What will be the shortfall or excess amount?

-Sam would like to retire. He wants to withdraw $23,000 at the end of each year for the next 20 years, after which he assumes that he will have left this earth. How much must Sam have in his retirement account at the time he retires if he is able to earn 6% on his retirement fund?

-Sam as question # 4 above, but Sam now wishes to withdraw the initial payment of the 1st day of the year instead of the last day.

-Morgan decides to deposit a $21,000 gift from her grandmother into the bank. She will earn 8% annual interest compounded semi-annually. How much money will Morgan have 15 years from now?

Mark Sexton and Todd Story, the owners of S&S Air, Inc., were impressed by the work Chris had done on financial planning. Using Chris’s analysis, and looking at the demand for light aircraft, they have decided that their existing fabrication equipment is sufficient, but it is time to acquire a bigger manufacturing facility. Mark and Todd have identified a suitable structure that is currently for sale, and they believe they can buy and refurbish it for about $35 million. Mark, Todd, and Chris are now ready to meet with Christie Vaughan, the loan officer for First United National Bank. The meeting is to discuss the mortgage options available to the company to finance the new facility.

Christie begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between S&S Air and the bank, there would be no closing costs for the loan. Christie states that the APR of the loan would be 6.1 percent. Todd asks if a shorter mortgage loan is available. Christie says that the bank does have a 20-year mortgage available at the same APR.

Mark decides to ask Christie about a “smart loan” he discussed with a mortgage broker when he was refinancing his home loan. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. Christie informs him that the bank does have smart loans. The APR of the smart loan would be the same as the APR of the traditional loan. Mark nods his head. He then states this is the best mortgage option available to the company since it saves interest payments.

Christie agrees with Mark, but then suggests that a bullet loan, or balloon payment, would result in the greatest interest savings. At Todd’s prompting, she goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 30-year traditional mortgage. In this case, there would be a 5-year bullet. This would mean that the company would make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the company makes the 60th payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Chris then asks how the bullet payment is calculated. Christie tells him that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage.

Todd has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Christie says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5 percent. She goes on to further explain the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the company would repay the $35 million. However, the company can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment.

Mark and Todd are satisfied with Christie’s answers, but they are still unsure of which loan they should choose. They have asked Chris to answer the following questions to help them choose the correct mortgage.

QUESTIONS

4. Assume S&S Air takes out a bullet loan under the terms described. What are the payments on the loan?

5. What are the payments for the interest-only loan?

6. Which mortgage is the best for the company? Are there any potential risks in this action?

Related Documents

FIN 3100
Final Exam
Study Guide
FIN 3100 Study Guide - Midterm Guide: Annual Percentage Rate, Real Interest Rate, Nominal Interest Rate
peachbuffalo68
FIN 502 Lecture Notes - Lecture 11: Stock Market, Overdraft, Reinvestment Risk
coffeegnu815
FIN 300
Final Exam
Study Guide
FIN 300 Study Guide - Final Guide: Capital Intensity, Asset Turnover, Fixed Asset
ambersquirrel314

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in