Question

E1- Go to the Federal Reserve Web site, http://www.federalreserve.gov. Click on the Consumer Information tab, and research consumer credit in the various hyperlinks. Find average interest rates charged by commercial banks on new automobile loans, personal loans, and credit card plans.

a. Compare the average level of interest rates among the three types of loans.

b. Click on the Economic Research & Data tab, click on the “Statistics: Releases and Historical Data” hyperlink and then “Consumer Credit,” and compare trends in the cost of consumer credit provided by commercial banks over the past three years.

P2- Find the FV of $10,000 invested now after five years if the annual interest rate is 8 percent.

a. What would be the FV if the interest rate is a simple interest rate?

b. What would be the FV if the interest rate is a compound interest rate?

P3- Determine the future values (FVs) if $5,000 is invested in each of the following situations:

• a.5 percent for ten years?

• b.7 percent for seven years?

• c.9 percent for four years?

P4- You are planning to invest $2,500 today for three years at a nominal interest rate of 9 percent with annual compounding.

a. What would be the future value (FV) of your investment?

b. Now assume that inflation is expected to be 3 percent per year over the same three-year period. What would be the investment’s FV in terms of purchasing power?

c. What would be the investment’s FV in terms of purchasing power if inflation occurs at a 9 percent annual rate?

P5- Find the present value (PV) of $7,000 to be received one year from now assuming a 3 percent annual discount interest rate:

Also calculate the PV if the $7,000 is received after two years?

P6- Determine the present values (PVs) if $5,000 is received in the future (i.e., at the end of each indicated time period) in each of the following situations:

a. 5 percent for ten years?

b. 7 percent for seven years?

c. 9 percent for four years?

P7- Determine the present value (PV) if $15,000 is to be received at the end of eight years and the discount rate is 9 percent. How would your answer change if you had to wait six years to receive the $15,000?

Present Value= 15,000* PV Factor

Present Value for 6 yrs= 15000*PV Factor

P16- Use a financial calculator or computer software program to answer the following questions:

a. What would be the future value (FV) of $15,555 invested now if it earns interest at 14.5 percent for seven years?

b. What would be the FV of $19,378 invested now if the money remains deposited for eight years and the annual interest rate is 18 percent?

P17- Use a financial calculator or computer software program to answer the following questions:

a. What is the present value (PV) of $359,000 that is to be received at the end of twenty-three years if the discount rate is 11 percent?

b. How would your answer change in (a) if the $359,000 is to be received at the end of twenty years?

P19- Use a financial calculator or computer software program to answer the following questions.

a. What would be the future value (FV) of $19,378 invested now if the money remains deposited for eight years, the annual interest rate is 18 percent, and interest on the investment is compounded semiannually?

b. How would your answer for (a) change if quarterly compounding were used?

Sample paper

## Finance homework Answers

QUESTION E1

There is an increase in the interest rate charged for new automobile compared to previous months as well as used cars. Most recent statistics shows that 60-month new car loan is being charged at 4.26% which is an increase from 4.17%.on the other side; there has been a slight decrease in the interest rate of credit cards from 16.31% to 16.28%. However, the average interest rate for personal loans has reduced significantly from 4.82% to 4.75%.

QUESTION E2

Fluctuations in the economic status of the country have led to significant changes in the cost of consumer credit provided by commercial banks. Consumer credit indicates the potential future spending levels and shows the extent to which benchmark interest rates have manifested. Over the past three years, there has been a significant increase in the cost of credit card charged by consumers owing to the harsh economic conditions.

QUESTION P2

FV= PV*(FV factor)

PV=$ 10,000

Time (N) =5 years

Interest rate (I) = 8%

FV=$ 10,000*(1.46933)

FV= $ 14,693.3

QUESTION P2 (A)

Simple interest rate = (P*R*T)/100

S.I= ($ 10,000*8*5)/100

S.I= $4,000

FV= $ 4000+$ 10000

FV=14,000

QUESTION P2 (B)

Compound interest rate = P (1+r)^{ t}

A=$ 10000*(1+0.08)^{5}

A= $ 14693.28

FV= $ 14693.28

QUESTION P3

- PV= $ 5,000

I= 5 %

N=10 years

FV= PV*(FV factor)

FV= $ 5,000*(1.62889)

FV= $ 8144.45

- PV= $ 5,000

I= 7%

N= 7 years

FV= PV*(FV factor)

FV= $5,000*(1.60578)

FV= $8,028.9

- PV= $ 5,000

I=9%

N= 4 years

FV= PV*(FV factor)

FV= $ 5,000*(1.41158)

FV = $ 7,057.9

QUESTION P4 (A)

PV= $ 2,500

I= 9%

N= 3 years

Compound interest = P (1+r)^{ t}

FV= $ 2,500 (1+0.09)^{3}

FV= $ 3237.57

QUESTION P4 (B)

PV= $ 2,500

I= 9%

N= 3 years

First year= Compound interest = P (1+r)^{ t}

A= $ 2,500 (1+0.09)^{1}

A= $ 2,522.5

Second year = P (1+r)^{ t}

A= $ 2,522.5 (1+0.12)^{1}

A= $ 2,825.2

Third year= P (1+r)^{ t}

A= $ 2,825.2 (1+0.15)^{1}

A= $ 3,248.98

FV= $ 3,248.98

QUESTION P4 (C0

PV= $ 2,500

I= 9%

N= 3 years

First year = P (1+r)^{ t}

A= $ 2,500 (1+0.09)^{1}

A= $ 2,725

Second year= P (1+r)^{ t}

A= $ 2,725 (1+0.09)^{1}

A= $ 2,970.25

Third year = P (1+r)^{ t}

A= $ 2,970.25 (1+1.09)^{1}

A= $ 3,237.57

FV=$ 3,237.57

QUESTION P5 (A)

FV=$ 7,000

I=3%

N=1year

PV=FV*(1/ (1+I)^{ n})

PV=$ 7,000 *[1/ (1+0.03)^{1}]

PV=$ 7,000 *[1/1.03]

PV=$ 7,000*0.9709

PV=$ 6,796.12

QUESTION P5 (B)

FV=$ 7,000

I=3%

N=2year

PV=FV*(1/ (1+I)^{ n})

PV=$ 7,000 *[1/ (1+0.03)^{2}]

PV=$ 7,000* [1/1.0609]

PV=$ 7,000*0.9426

PV= $ 6,598.17

QUESTION P6

- FV= $ 5,000

I=5%

n=10 years

PV=FV*(1/ (1+I)^{ n})

PV=$ 5,000*[1/ (1+0.05)^{10}]

PV=$ 5,000*[1/1.6289]

PV=$ 5,000*0.6139

PV= $ 3,069.57

- FV= $ 5,000

I=7%

n=7 years

PV=FV*(1/ (1+I)^{ n})

PV=$ 5,000*[1/ (1+0.07)^{7}]

PV=$ 5,000*[1/ (1.6058)]

PV=$ 5,000*0.6227

PV= $ 3,113.75

- FV= $ 5,000

I=9%

n=4 years

PV=FV*(1/ (1+I)^{ n})

PV=$ 5,000*[1/ (1+0.09)^{4}]

PV=$ 5,000*[1/1.4116]

PV=$ 5,000*0.7084

PV=$ 3,542.13

QUESTION P7

- FV= $ 15,000

N= 8 years

I= 9

PV for 8 years = FV*(FV factor)

PV=$ 15,000*0.502

PV=$ 7,530

- FV= $ 15,000

N= 6 years

I= 9

PV for 6 years = FV*(FV factor)

PV=$ 15,000* 0.596

PV= $ 8, 940

QUESTION P16

PV= $15,555

I=14.5%

n= 7 years

FV= PV*(FV factor)

FV=$15,555*(1+0.145)^{7}

FV=$15,555*2.5801

FV=$ 40,133.63

QUESTION P16 (B)

PV=$19,378

I=18%

n= 8 years

FV= PV*(FV factor)

FV=$19,378*3.3799

FV= $ 65,495

QUESTION P17 (A)

FV=$ 359,000

N=23 years

I= 11%

PV = FV*(FV factor)

PV=$ 359,000*(1+0.11)^{-23}

PV=$ 359,000*0.0907

PV=$32,558.62

QUESTION P17 (B)

FV=$ 359,000

N=20 years

I= 11%

PV = FV*(FV factor)

PV=$ 359,000*(1+0.11)^{-20}

PV=$ 359,000*0.1240

PV=$ 44,528.17

QUESTION P19 (A)

PV= $19,378

N= 8 years

I=18%

Semiannually= FV=P (1+r/n)^{nt}

FV= $19,378*(1+0.18/2)^{2*8}

FV= $19,378*3.9703

FV=$ 76,936.59

QUESTION P19 (B)

PV= $19,378

N= 8 years

I=18%

Quarterly= FV=P (1+r/n)^{nt}

FV= $19,378*(1+0.18/2)^{3*8}

FV=$19,378*7.9111

FV=$ 153,301.29

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