assignment 2
TRANSCRIPT
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Introduction to Finance
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Introduction to 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 5.00 / 5.00
Question Explanation
Basics of compounding.
Question 2
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(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 annuity.
Total 5.00 / 5.00
Question Explanation
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 Mohammad’s account worth today? (Enter just the number without
the $ sign or a comma; round off decimals.)
Answer for Question 3
You entered:
Your Answer Score Explanation
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20971 ✘ 0.00
Total 0.00 / 5.00
Question Explanation
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 annuity.
Total 5.00 / 5.00
Question Explanation
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.
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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
You entered:
Your Answer Score Explanation
3959 ✔ 10.00 Correct. You know how to calculate the PV of an annuity.
Total 10.00 / 10.00
Question Explanation
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 calculation.
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Total 10.00 / 10.00
Question Explanation
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
You entered:
Your Answer Score Explanation
12933 ✔ 15.00 Correct. You know how to understand and analyze real world problems with multiple layers.
Total 15.00 / 15.00
Question Explanation
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.
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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. Be careful!
Total 10.00 / 15.00
Question Explanation
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
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(yes, gain 4053) ✘ 0.00 Correct decision, calculation incorrect. Think about the interest rate you are using at the last stage.
Total 0.00 / 15.00
Question Explanation
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
You entered:
Your Answer Score Explanation
a ✘ 0.00
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Total 0.00 / 15.00
Question Explanation
This is a problem that you will face all the time; draw time lines and think through carefully.