Finance Problem Set 2

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School

University of Wisconsin, Madison *

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221

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Finance

Date

Feb 20, 2024

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docx

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Uploaded by CaptainDangerSpider10

Finance Problem Set 2 You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn 6% on your money. Which option should you take and why? A) You should accept the payments because they are worth $209,414 to you today B) You should accept the payments because they are worth $247,800 to you today C) You should accept the payments because they are worth $336,000 to you today D) You should accept the $200,000 because the payments are only worth $189,311 to you today E) You should accept the $200,000 because the payments are only worth $195,413 to you today E) You should accept the $200,000 because the payments are only worth $195,413 to you today The design team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 4.5% interest compounded monthly. The first deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years? A) $80,459.07 B) $80,760.79 C) $81,068.18 D) $81,333.33 E) $81,548.20 B) $80,760.79 You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money if you need, if you make payments of $30 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2% interest per month. How much are you borrowing? A) $164.09 B) $168.22 C) $169.50 D) $170.68 E) $171.40 E) $171.40 You are scheduled to receive annual payments of $5,100 for each of the next 7 years. The discount rate is 10%. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

A) $2,483 B) $2,513 C) $2,721 D) $2,727 E) $2,804 A) $2,483 John's auto repair just took out a $52,000, 10-year, 8%, interest-only loan from the bank. Payments are made annually. What is the amount of the loan payment in year 10? A) $7,120 B) $8,850 C) $13,264 D) $49,000 E) $56,160 E) $56,160 On the day you entered college, you borrowed $18,000 on an interest-only, four-year loan at 5.25% from your local bank. Payments are to be paid annually. What is the amount of your loan payment in year 2? A) $945 B) $1,890 C) $3,600 D) $5,106 E) $6,250 A) $945 First century bank wants to earn an effective annual return on its consumer loans of 10% per year. The bank uses daily compounding on its loans. By law, what interest rate is the bank required to report to potential borrowers? A) 9.23% B) 9.38% C) 9.53% D) 9.72% E) 10.00% C) 9.53%

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