Suggestion: Print out a copy of this review and open the site that contains the spreadsheets for this chapter. You will be allowed to use these spreadsheets for the exam.
Vocabulary:
a. Simple Interest
b. Compound Interest
c. Annual Percentage Rate (APR)
d. Principal
e. Accumulated Balance
f. Annual Percentage Yield (APY)
g. Annuity
h. Liquidity
i. Risk
j. Return
k. Annual Return
l. Total Return
m. Stock
n. Capitol Gain
o. Dividend
p. Bond
q. Face Value
r. Market Value
s. Coupon Rate
t. Current Yield
u. Maturity Date
v. Mutual Fund
w. Cash Investment
x. Mortgage
y. Term
z. Amortized Loan
aa. Loan Principal
ab. Down Payment
ac. Fixed Rate Mortgage
ad. Adjustable Rate Mortgage (ARM)
ae. Closing Costs
af. Points
ag. Prepayment Penalties
ah. Refinancing
SECTION 4A
1. Describe the difference between an investment that earns simple interest
for five years and an investment for which the interest is compounded annually
for five years.
2. To get the best return should you deposit $1000.00 in a bank that
offers an APR of 5% compounded annually for five years or $1000.00
in a bank in a bank that offers 4.9% compounded monthly? Explain.
3. Find the Annual Percentage Yield for an investment of $500.00 with
an APR of 12% compounded quarterly for 1 year.
SECTION 4B
4. Jack deposits $75.00 each month in an account with an APR of
6% while Mary deposits $70.00 each month in an account with an APR of 7%.
In ten years who has more in their account? How much more?
5. If you plan to retire in 40 years with $2,000,000.00, how much
should you save each month in a plan that offers an APR of 10%?
6. Use the Total Return and Annual Return Formula to compute the following:
a. Five years after paying $200.00 for shares in a start-up company you sell the shares for $1000.00
Total Return =
Annual Return =
b. Three years after paying $10,000.00 for shares in a wagon wheel company you sell them for $600.00
Total Return =
Annual Return =
7. Find the Total Gain on 100 shares of stock that you bought one year
ago at $36.00 per share that you now sell at $52.00 per share. Assume
that the commission totals $.50 per share and the yearly dividend is $1.20
per share.
8. Calculate the yield on a $2000.00 bond with a coupon rate of 7% that
has a market value of $1950.
9. Calculate the annual interest that you will receive on
a $500.00 treasury bond with a current yield of 7% that is quoted at 104
points
SECTION 4C
10. Suppose you need a loan of $10,000.00, and are offered a choice
of a 3-year loan at 7% interest or a 5-year loan at 8% interest.
Discuss the pros and con of each choice.
11. Suppose you apply for a $90,000.00 house mortgage. You have two loan options from which to choose. Option 1 is a 20-year fixed-rate loan at 8% and Option 2 is a 25 year fixed rate loan at 8%.
a. What are your monthly payments?
Option 1 monthly payment =
Option 2 monthly payment =
b. What is the total payment for the mortgage?
Option 1 total payment =
Option 2 total payment =
c. What is the amount of interest paid for the mortgage?
Option 1 interest paid =
Option 2 interest paid =
d. Discuss possible considerations when determining your choice of option.
SOLUTIONS
SECTION 4A
1. Describe the difference between an investment that earns simple interest
for five years and an investment for which the interest is compounded annually
for five years.
Compounded investment wil hav a higher Annual Yield.
2. To get the best return should you deposit $1000.00 in a bank that
offers an APR of 5% compounded annually for five years or $1000.00
in a bank in a bank that offers 4.9% compounded monthly? Explain.
5% investment returns $1276.28, 4.9% investment returns $1276.98
3. Find the Annual Percentage Yield for an investment of $500.00 with
an APR of 12% compounded quarterly for 1 year.
12.555
SECTION 4B
4. Jack deposits $75.00 each month in an account with an APR of
6% while Mary deposits $70.00 each month in an account with an APR of 7%.
In ten years who has more in their account? How much more?
Jack has $12,290.95 and Mary has $12115.94
5. If you plan to retire in 40 years with $2,000,000.00, how much
should you save each month in a plan that offers an APR of 10%?
$316.25
6. Use the Total Return and Annual Return Formula to compute the following:
a. Five years after paying $200.00 for shares in a start-up company you sell the shares for $1000.00
Total Return = 400%
Annual Return = 38%
b. Three years after paying $10,000.00 for shares in a wagon wheel company you sell them for $600.00
Total Return = -94%
Annual Return = -61%
7. Find the Total Gain on 100 shares of stock that you bought one year
ago at $36.00 per share that you now sell at $52.00 per share. Assume
that the commission totals $.50 per share and the yearly dividend is $1.20
per share.
$1,670.00
8. Calculate the yield on a $2000.00 bond with a coupon rate of 7% that
has a market value of $1950.
7.18%
9. Calculate the annual interest that you will receive on
a $500.00 treasury bond with a current yield of 7% that is quoted at 104
points
$36.40
SECTION 4C
10. Suppose you need a loan of $10,000.00, and are offered a choice
of a 3-year loan at 7% interest or a 5-year loan at 8% interest.
Discuss the pros and con of each choice.
7% loan payment $308.77 and total repay of $11,115.76
8% loan payment of $202.76 and total repay of $12,165.92
11. Suppose you apply for a $90,000.00 house mortgage. You have two loan options from which to choose. Option 1 is a 20-year fixed-rate loan at 8% and Option 2 is a 25 year fixed rate loan at 8%.
a. What are your monthly payments?
Option 1 monthly payment = $752.80
Option 2 monthly payment = $694.63
b. What is the total payment for the mortgage?
Option 1 total payment = $180,699.50
Option 2 total payment = $208,393.17
c. What is the amount of interest paid for the mortgage?
Option 1 interest paid = $90,669.50
Option 2 interest paid = $118,393.17
d. Discuss possible considerations when determining your choice
of option.
Option 1 Higher monthly payment, lower total payback
Option 2 Lower monthly payment, higher total payback