Time Value of Money and Valuing Bonds
Amortization with Equal Payments Prepare an amortization schedule for a five-year loan of $36,000. The interest rate is 9 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year? Answer: $2,108.52
Amortization with Equal Principal Payments Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $7,200 every year instead of equal annual payments. Answer: $1,944.00
Calculating Annuity Values Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $20,000 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 10 years at an estimated cost of $325,000. Third, after he passes on at the end of the 20 years of withdrawals, he would like to leave an inheritance of $750,000 to his nephew Frodo. He can afford to save $2,000 per month for the next 10 years. If he can earn an 11 percent EAR before he retires and an 8 percent EAR after he retires, how much will he have to save each month in years 11 through 30? Answer: $2,259.65
Calculating Annuity Values After deciding to buy a new car, you can either lease the car or purchase it on a three-year loan. The car you wish to buy costs $28,000. The dealer has a special leasing arrangement where you pay $1 today and $380 per month for the next three years. If you purchase the car, you will pay it off in monthly payments over the next three years at an 8 percent APR. You believe you will be able to sell the car for $15,000 in three years. Should you buy or lease the car? What break-even resale price in three years would make you indifferent between buying and leasing? Answer: Lease, $20,161.86
Calculating Annuity Payments This is a classic retirement problem. A time line will help in solving it....
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