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# ADMS 3530 2008.pdf

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Lois King
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AKADMS 353003 Finance Midterm Exam Winter 2008 February 17 2008 SolutionsType A ExamNumerical questions 4 points each 1 Q 2 in B Janet owes her friend some money She is given the following alternatives of payment If the discount rate is 6 which of the following alternatives of payment is best for herA Pay 9750 now B 2000 per year for 5 years each payable at the end of the year C 1950 per year for 5 years each payable at the beginning of the year D 2000 at the end of year 1 5000 at the end of year 2 3000 at the end of year 3 and 1200 at the end of year 4Answer BPV A9750 PV B is the PV of a 5year annuity842473 PV C is the PV of a 5year annuity due870696 and PV D980614 She should choose B since alternative B has the lowest PV today2 Q 1 in B Jeff Hanson wants to have 1000000 at the end of 15 years He has 10000 to invest now and his father will give him 100000 in 5 years from today In addition he is planning to invest an equal amount of X at the end of every year for the next 15 years to reach his goal If the rate of interest is 8 how much is X A 25657 B 27710 C 30249 D 31978Answer B1510First his goal is 10000001000010810000010875238581 Then n15 IY8 FV75238581 PV0 CPT PMT 277103 Q 7 in B Walter wants to save 5000 nominal dollars per year at the end of each year for the next 30 years for his retirement The expected annual nominal rate of interest is 6 for the first ten years 7 for the next ten years and 8 for the last ten years The expected annual rate of inflation is 3 for the first ten1years 25 for the next ten years and 2 for the last ten years At the end of 30 years how much in real dollars will he haveA 239127 B 329214 C 472038 D 501466Answer AFirst in 30 years he will have in nominal dollars the amount of FVAF 5000 10 101010years 6107108FVAF 5000 10 years 7108FVAF 5000 10 years 8501466 Then in terms of real dollars 101010501466103 1025 102 which is equal to 239127 in real dollars Please note there are several ways to solve this question4 Q 8 in B If 165000 is borrowed for a home mortgage to be repaid monthly at a 625 APR semiannually compounded over 20 yearsAssuming that monthly payments begin in one month from now how much interest will you pay in dollars over the life of the mortgage loanA 122614 B 159106 C 165000 D 287614Answer AThe semiannual rate006252003125 2EAR10312510063477 1121 0063477 10005142 The monthly rate imThe number of months in the mortgage n20yrs12mthsyr240 months Find the monthly payment with a PV of 165000 using your calculator PV165000 n240 IY05142 FV0 CPT PMT119839 The total interest paid over the life of the mortgage is given by Interest paidTotal paymentsPrincipal11983924016500012261360 or 1226145 Q 9 in B You borrowed 5000 from your sister and agreed to pay back the loan with monthly payments of 200 beginning immediatelyHow long will it take you to pay back the loan if you agree on a 15 APR with monthly compounding2
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