Answer for Hw1
Corporate Finance Home Wok
Chapter 4
Q1: Simple Interest versus compound Interest First City Bank pays 9 percent simple interest on its savings account balances, whereas Second City Bank pays 9 percent interest compounded annually. If you made a $5,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years?
A: First City Bank: 5000*(1+10*0.09)=9500 Second City Bank: 5000*(1+0.09)10=11837
11837-9500=2337
So we will earn more $2,337 from Second City Bank account at the end of 10 years.
Q17: Calculating EAR First National Bank charges 10.1 percent compounded monthly on its business loans. First United Bank charges 10.4 percent compounded semiannually. As a potential borrower, to which bank would you go for a new loan?
A: First National Bank: EAR=1+0.1011212-1=0.1058 First United Bank: EAR=1+0.10422-1=0.1067
So as a potential borrower, I would like to choose the First National Bank to go for a new loan.
Q23: Calculating Annuities You are planning to save for retirement over the next 30 years. To do this, you will invest $700 a month in a stock account and $300 a month in a bond account. The return of the stock account is expected to be 10 percent, and the bond account will pay 6 percent. When you retire, you will combine your money into an account with an 8 percent return. How much can you withdraw each month from your account assuming a 25-year withdrawal period?
A: FVStock=700*(1+0.112)360-10.112=1582341.55 FVbond=300*(1+0.0612)360-10.0612=301354.51 PVA=1582341.55+301354.51=C*1-1(1+0.0812)3000.0812=14538.67
So you can withdraw $14538.67 each month from the account assuming a 25-year withdrawal period.
Q30: Balloon Payments Audrey Sanborn has just arranged to purchase a $450,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 7.5 percent stated annual interest rate, compounded monthly, and calls for equal monthly payments over the next 30 years. Her first payment will
Chapter 4
Q1: Simple Interest versus compound Interest First City Bank pays 9 percent simple interest on its savings account balances, whereas Second City Bank pays 9 percent interest compounded annually. If you made a $5,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years?
A: First City Bank: 5000*(1+10*0.09)=9500 Second City Bank: 5000*(1+0.09)10=11837
11837-9500=2337
So we will earn more $2,337 from Second City Bank account at the end of 10 years.
Q17: Calculating EAR First National Bank charges 10.1 percent compounded monthly on its business loans. First United Bank charges 10.4 percent compounded semiannually. As a potential borrower, to which bank would you go for a new loan?
A: First National Bank: EAR=1+0.1011212-1=0.1058 First United Bank: EAR=1+0.10422-1=0.1067
So as a potential borrower, I would like to choose the First National Bank to go for a new loan.
Q23: Calculating Annuities You are planning to save for retirement over the next 30 years. To do this, you will invest $700 a month in a stock account and $300 a month in a bond account. The return of the stock account is expected to be 10 percent, and the bond account will pay 6 percent. When you retire, you will combine your money into an account with an 8 percent return. How much can you withdraw each month from your account assuming a 25-year withdrawal period?
A: FVStock=700*(1+0.112)360-10.112=1582341.55 FVbond=300*(1+0.0612)360-10.0612=301354.51 PVA=1582341.55+301354.51=C*1-1(1+0.0812)3000.0812=14538.67
So you can withdraw $14538.67 each month from the account assuming a 25-year withdrawal period.
Q30: Balloon Payments Audrey Sanborn has just arranged to purchase a $450,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 7.5 percent stated annual interest rate, compounded monthly, and calls for equal monthly payments over the next 30 years. Her first payment will