School

University of WaterlooDepartment

CommerceCourse Code

COMM101Professor

Sofy CarayannopoulosStudy Guide

FinalThis

**preview**shows page 1. to view the full**5 pages of the document.**Final Exam TVM Review Questions

1. After graduation, you purchase your first car, a beautiful 2006 Pontiac G6, named Veronica.

Veronica is priced at $21,475. You sign a 36 month lease, with a $2,000 deposit upfront. The

residual payment at the end of the lease is $8,900. Veronica leases at a rate of 1.9% APR. How

much are the monthly lease payments?

2. Ron celebrated his 18th birthday by opening a savings account at TD Canada Trust and depositing

$3300. He continued to deposit the same amount on every subsequent birthday until he was 24

years old. After depositing $3300 on his 24th birthday, Ron decided to abandon his savings plan

but he left the remaining amount in the bank until he was 65 years old. The bank rate was 5%

compounded annually when he was making his deposits and 7% semi-annually when he stopped

depositing. What was his final lump sum?

3. Windy who is 20 wants to retire at the age of 60. She wants to begin depositing monthly

deposits today until she retires. Currently the bank interest rate is at 3% compounded semi-

annually due to the recession. Windy believes she can live to 80 years old and wants to make

end of month withdraws of $3,000 until she dies. Windy also wants to leave her children with

$250,000. Since the time she retires the economy has grown and the bank interest rate is at 8%

compounded semi-annually. How much does she need to deposit from today in order to

complete her retirement plan?

4. Apple wants to raise some money for their new Iphone 6 release in 2015. They have issue Apple

bonds at 5.5 due in 2025. Their first coupon payment is in 6 months. The current market interest

rate is 5% compounded semi-annually. What is the value of the bond?

5. a) Yannis’ parents were so excited that he was accepted into a university that they created an

account for him that earns 6% compounded semi-annually and will provide him with a payment

of $2,500 every six months for the next four years beginning today. What is the present value of

this annuity?

b) Rather than spending all of it, Yannis has decided to save $100 per month for the next four

years, beginning immediately, so that he can go travelling when he graduates. So that his

parents don’t figure this out, he is putting it in a savings account at another bank, but that bank

is offering him 5.5% interest semi- annually. How much will he have saved by the end of the four

year?

6. a) Kia was a little short of cash when she entered university because she had spent the summers

playing beach volleyball instead of working. To make up for the shortfall she has taken out a

loan of $20,000 at a rate of 5% compounded semi-annually. To repay the loan she has to make

monthly payments at the end of each month for five years. What should the size of the monthly

payment be so that her loan is fully repaid at the end of 5 years?

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b) If Kia decides to leave the country after 3 years to escape from paying off the rest of the loan,

how much will she still owe when she boards the plane?

7. Unlike Kia who played volleyball every summer, Yannis worked very hard throughout the year at

several jobs and saved his money. As a result, he had enough to buy a house. The house he

bought was worth $400,000. He paid 25% of the purchase price in cash and arranged a five year

mortgage with a rate of 6% compounded semi-annually for the remaining balance. The

mortgage has an amortization of 25 years.

a) What is the size of Yannis’ monthly payments (end of month)?

b) Each payment consists of interest and principal, how much is the interest and principal of

the first payment?

c) What are the interest and principal for the second payment?

d) After having made payments for 5 years, what is the outstanding mortgage?

e) How much principal have you repaid and how much principal after 5 years?

8. You are considering investment that requires an upfront payment of $5,000. In return it pays

$1,000 at the end of the first year, $2,000 at the end of the third year and an undisclosed

amount after 5 years. If the interest rate is 5% compounded annually, what is the undisclosed

amount paid?

9. A plaintiff awarded damages in civil court may be given a structured settlement, where they

paid in monthly installments by the defendant. If $1,000,000 of damages are awarded with a

interest rate of 5% compounded quarterly, what is the monthly payments if the final payment is

paid at the end of 5 years?

10. You are an agent for Messi – a talented football player for FC Barcelona. He wants you to help

him figure out which contract option he should accept given that the prevailing interest rate in

Spain is 4%.

a) $50,000,000 paid immediately for a 3 year contract.

b) Annual payments of $15,000,000 per year for 3 years starting today.

c) Annual payments of $17,500,000 per year for 3 years at the end of each year.

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