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Introduction to Finance
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Introduction to Finance
Gautam Kaul Professor of Finance

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Feedback Assignment 2
You submitted this Assignment on Wed 6 Feb 2013 7:49 AM PST. You got a score of 60.00 out of 100.00. You can attempt again, if you'd like.
Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates with up to two decimals. Read the syllabus for examples. The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100.

Question 1
(5 points) Carlos goes to the bank to take out a personal loan. The stated annual interest rate is 12%, but interest is compounded monthly and he will make monthly payments. The effective annual interest rate (EAR) of the loan is less than 12%.

Your Answer

Score

Explanation

False

5.00

Correct. You understand compounding.

Total
QuestionExplanation Basics of compounding.

5.00 / 5.00

Question 2

(5 points) Gloria is 35 and trying to plan for retirement. She has put a budget together and plans to save $4,800 per year, starting at the end of this year, in a retirement fund until she is 65. Assume that she can make 7% on her account. How much will she have for retirement at age 65?

Your Answer

Score

Explanation

453412

5.00

Correct. You know how to calculate the FV of an annui

Total
QuestionExplanation

5.00 / 5.00

FV of an annuity calculation. She should have a minimum of $144,000. Why?

Question 3
(5 points) Mohammad has just turned 21 and now has access to the money his parents have been putting away in an account for him since he was 5 years old. His mother has asked him to guess what his account is worth given that they have invested $1,000 every year in the account starting on his 5th birthday and have just made one. The interest rate on the account has been 3.5% annually. How much is Mohammads account worth today? (Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 3 Youentered:

Your Answer

Score

Exp

20971

0.00

Total
QuestionExplanation

0.00 / 5.00

FV value of an annuity calculation. Draw a time line. The amount should be a minimum of $17,000. Why?

Question 4
(5 points) Gerard has estimated that he is going to need enough in his retirement fund to withdraw $75,000 per year beginning on his 66th birthday and for 19 additional years thereafter. How much will Gerard need in his retirement account at age 65 if his fund is expected to earn an annual return of 9.5%?

Your Answer

Score

Explanation

660929

5.00

Correct. You know how to calculate the PV of an annui

Total
QuestionExplanation

5.00 / 5.00

Mecahnics of calculating the PV of an annuity. The amount has to be a maximum of $1,500,000. Why?

Question 5
(10 points) Rachna is considering a life insurance plan that will require her to pay a premium of $200 every year for the next 40 years. She wants to make sure that she is able to make this payment and wants to put away a lump sum today in her bank to cover all future payments.

How much would she need to deposit in her bank if the annual interest rate on her deposit account is 4%? (Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 5 Youentered:

Your Answer

Score

Explanation

3959

10.00

Correct. You know how to calculate the PV of an ann

Total
QuestionExplanation

10.00 / 10.00

PV of an annuity. Cannot be more than $8,000. Why?

Question 6
(10 points) Melanie and Stephen Jackson are purchasing their first house. The house costs $360,000. They have put a 20 percent down payment (that is, an amount that banks should require you to pay out-of-pocket), but will therefore finance the rest. They are considering a fixed rate 30-year mortgage at a 5.25% APR with monthly payments. How much will the Jacksons' first monthly payment be?

Your Answer

Score

Explanation

1590

10.00

Correct. You know how to do a PMT calculatio

Total
QuestionExplanation

10.00 / 10.00

This payment is a simple PMT calculation; the amount has to be more than $800 per month. Why?

Question 7
(15 points) Abebi, who has just celebrated her 29th birthday, will retire on her 55th birthday, and she has just set up a retirement plan to pay her income starting on her retirement day, and to continue paying for 19 more years. Abebi's goal is to receive $120,000 for each of these twenty years. In creating her retirement account, Abebi has committed to set aside equal payments at the end of each year, for the next 25 years starting on her 30th birthday. If the annual interest rate is 9%, how big should Abebi's equal payments be?(Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 7 Youentered:

Your Answer

Score

Explanation

12933

15.00

Correct. You know how to understand and analyze real world proble

Total
QuestionExplanation

15.00 / 15.00

A multi-layer problem, now that you know the mechanics of most calculations.Draw a timeline; it is key. Remember a spreadsheet is a time line.

Question 8
(15 points) Jingfei bought a house 10 years ago for $200,000. Her down payment on the house was the minimum required 10% at that time she financed the remainder with a 15-year fixed rate mortgage. The annual interest rate was 10% and she was required to make monthly payments, and she has just made her 120th payment. A new bank has offered to refinance the remaining balance on Jingfei's loan and she will have to pay $1,900 per month for the next 5 years, but the total fees she will have to pay today to get the new loan is $1,000. Should she take the new offer? How much will she gain or lose in today's dollars if she does? Annual interest rates are still 10%.

Your Answer

Score

Explanation

(no, loss 614)

10.00

You have the right calculation, but the wrong sign. B

Total
QuestionExplanation

10.00 / 15.00

This is a multi-layer problem; richer and more practical. Always draw time lines.

Question 9
(15 points) You have been living in the house you bought 10 years ago for $300,000. At that time, you took out a loan for 80% of the house at a fixed rate 15-year loan at an annual stated rate of 9%. You have just paid off the 120th monthly payment. Interest rates have meanwhile dropped steadily to 6% per year, and you think it is finally time to refinance the remaining balance. But there is a catch. The fee to refinance your loan is $4,000. Should you refinance the remaining balance? How much would you save/lose if you decided to refinance?

Your Answer

Score

Explanation

(yes, gain 4053)

0.00

Correct decision, calculation incorrect. Think about the interest rat

Total
QuestionExplanation

0.00 / 15.00

This is an even more realistic version of the mortgage problem. Think carefully about time lines and relevant interest rates to make different calculations.

Question 10
(15 points) You are interested in a new Ford Taurus. After visiting your Ford dealer, doing your research on the best leases available, you have three options. (i) Purchase the car for cash and receive a $1,500 cash rebate from Dealer A. The price of the car is $15,000. (ii) Lease the car from Dealer B. Under this option, you pay the dealer $500 now and $200 a month for each of the next 36 months (the first $200 payment occurs 1 month from today). After 36 months you may buy the car for $8,000. (iii) Purchase the car from Dealer C who will lend you the entire purchase price of the car for a zero interest 36-month loan with monthly payments. The car price is $15,000. Suppose the market interest rate is 6%. What is the net cost today of the cheapest option? (Enter just the number without the $ sign or a comma; round off decimals.Since this asks for a cost, you just enter the number without a negative sign.) Answer for Question 10 Youentered:

Your Answer

Score

Ex

0.00

Total
QuestionExplanation

0.00 / 15.00

This is a problem that you will face all the time; draw time lines and think through carefully.