Name: ___________________________________

NetID: _______________________

HADM 2250, Prof. Q. Ma

Homework assignment #2
1. If you put up $28,000 today in exchange for an 8.25 percent, 15-year annuity, what will the annual
cash flow be?

2. For the given APR rates and compounding, calculate the effective annual rate.
Stated rate (APR)
Compounding
EAR
9%
Quarterly
18%
Monthly
14%
Daily
11%
Infinite

3. In each of the following cases, find the APR.

Stated rate (APR)
Compounding
Semiannually
Monthly
Weekly
Infinite

Hadm 2250, Prof. Q. Ma

Effective rate (EAR)

11.%
12.4%
10.1%
13.8%

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4. First National Bank charges 13.2 percent compounded monthly on its business loans. First United
Bank charges 13.5 percent compounded semiannually. Calculate the EAR for First National Bank
and First United Bank.

5. You want to buy a new sports coupe for $83,500, and the finance office at the dealership has
quoted you a 6.5 percent APR loan for 60 months to buy the car. What will your monthly
payments be?

6. One of your customers is delinquent on his accounts payable balance. Youve mutually agreed to a
repayment schedule of $500 per month. You will charge 1.7 percent per month interest on the
overdue balance. If the current balance is $16,000, how long will it take for the account to be paid
off?

7. Friendlys Quick Loans, Inc., offers you $3 for $4 or I knock on your door. This means you get
$3 today and repay $4 when you get your paycheck in one week (or else). What APR would
Friendlys say you were paying? Whats the effective annual return Friendlys earns on this lending
business?

Hadm 2250, Prof. Q. Ma

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NetID: _______________________

8. You are planning to save for retirement over the next 30 years. To do this, you will invest $800 a
month in a stock account and $400 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 a 7 percent return. How much can you withdraw each
month from your account assuming a 25-year withdrawal period?

9. Youve just joined the investment banking firm of Dewey, Cheatum, and Howe. Theyve offered you
two different salary arrangements. You can have $75,000 per year for the next two years, or you can
have $64,000 per year for the next two years, along with a $20,000 signing bonus today. The bonus
is paid immediately, and the salary is paid in equal amounts at the end of each month. If the interest
rate is 10 percent compounded monthly, what is the PV for both the options?

10. Youre prepared to make monthly payments of $290, beginning at the end of this month, into an
account that pays 7 percent interest compounded monthly. How many payments will you have made
when your account balance reaches $20,000?

11. What is the value today of $4,000 per year, at a discount rate of 10 percent, if the first payment is
received 6 years from today and the last payment is received 20 years from today?

Hadm 2250, Prof. Q. Ma

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Name: ___________________________________

NetID: _______________________

12. You have just arranged for a $1,800,000 mortgage to finance the purchase of a large tract of land.
The mortgage has an APR of 7.8 percent, and it calls for monthly payments over the next 30 years.
However, the loan has an eight-year balloon payment, meaning that the loan must be paid off then.
How big will the balloon payment be?

13. Even though most corporate bonds in the United States make coupon payments semiannually,
bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a
bond with a par value of 1,000, 25 years to maturity, and a coupon rate of 6.4 percent paid annually.
If the yield to maturity is 7.5 percent, what is the current price of the bond?

14. Ninja Co. issued 14-year bonds a year ago at a coupon rate of 6.9 percent. The bonds make
semiannual payments. If the YTM on these bonds is 5.2 percent, what is the current bond price?

Hadm 2250, Prof. Q. Ma

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