Fin 534 Chapter 4 Homework

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• Published : April 19, 2012

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Brandon Powell
FIN 534 Chapter 4
Question 1
A, D, and E can be ruled out as incorrect by simple reasoning. “B” is also incorrect because interest in the first year would be Loan amount × interest rate regardless of the life of the loan, so the interest payment would be identical for the first payment. Think about the situation where r = 0%, statement “C” is the "most logical guess." One could also set up an amortization schedule and change the numbers to confirm that only c is correct. Question 2

To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is essentially a trial and error procedure that is easy with a computer or financial calculator but difficult otherwise. Question 3

Effect Annual Rate of Riverside Bank:
rR = (1 + (0.065 / 12)) ^ 12 = 1.067
Effective Annual rate of Midwest Bank
rM = (1 = (0.07 / 1)) ^ 1 = 1.07
Effective Annual Rate of Midwest Bank is higher by (1.07 – 1.067) 0.003 or 0.3%

Question 4
8 i (interest earned)
46 n (periods remaining)
-2500 pmt (payment made into the account each period)
0 PV (starting balance of account)
solve for FV
FV = \$1,129,750.38

We can now use this value to solve backwards

8 i
41 n (only 41 more payments here)
0 PV (starting balance)
1,129,750.38 FV (ending value)
solve for pmt
pmt = 3,725.55 ~ 3,726

Question 5