ADMS 3530 Lecture Notes - Lecture 9: Effective Interest Rate, Savings Account, Callable BondExam
Course CodeADMS 3530
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ADMS 3530 SU19 – Midterm Exam Tutorial – QUESTIONS
TIME VALUE OF MONEY
1. You have retired early from your successful finance career and are donating $5,500,000 to
York University. This money will be used to pay for scholarships totaling $300,000 each year
forever. If the first scholarships are awarded (and paid) today, what is the interest rate that is
being earned on your donation?
2. What is the true value of a stated "$1 million prize", if the prize is paid out in 40 payments of
$25,000 per year and the first payment is made immediately? The interest rate is 6.5%,
3. Compute the present value of the following set of payments for two years: $300 each quarter
for the first year and $600 each quarter for the second year. The effective annual rate is 6% and
payments will begin at the end of the first quarter.
4. Your parents are willing to pay for your MBA degree and want to put aside funds today even
though you will not be entering MBA school for another 3 years (from today). If they can earn
4.5% annually on the funds and your MBA school will cost $35,000 at the beginning of each
year of the two-year program, how much money do they need to set aside today?
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5. You decide to buy a house that costs $700,000. You make a 15% down payment and finance
the rest with a 25 year mortgage. The mortgage has a five year renewal term for which the
posted mortgage rate is 5.80% (APR compounded semi-annually). What will the remaining
principal of the loan be at the end of the 5-year term?
6. You want to purchase a condo in Milton for $400,000 cash in 6 years from today. To save for
this purchase you plan to deposit $X in years 1 to 4 but no deposit in years 5 or 6. If the interest
rate on your deposits is 6.5% compounded annually, how much is $X?
7. Which of the following strategies will allow real retirement spending to remain
approximately equal, assuming savings of $1,000,000 invested at 8% annually, a 25-year time
horizon, and a 4 percent expected annual inflation rate?
A) Spend approximately $63,000 annually.
B) Spend approximately $78,225 annually.
C) Spend approximately $93,680 annually.
D) Spend approximately $127,500 annually.
8. You will retire in 25 years at which time you would like to have $1,000,000 in savings.
Luckily, you will receive $150,000 in 5 years from today when your Canada savings bond
matures. How much will you need to save at the end of each of the next 25 years to reach your
retirement goal? You can earn 6% per year on all of your investments.
9. What is the effective annual rate on a deposit of $3,000 made eight years ago
if the deposit is worth $4,453.52 today? The deposit pays interest semi-annually.
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