1. Your family recently bought a house.

To buy the house, your family took a $100,000, 5-year loan

with 9 percent nominal interest rate. Interest is charged yearly and all payments are made at the
end of the year. a. What would the the fixed yearly payments? b. Prepare an amortization schedule
showing breakdown of yearly principal and interest payments to settle the loan.

2. Your father, who is 40, plans to retire in 15 years, and he expects to live independently for 10
years. Suppose your father wants to have retirement income of $40,000 each year after he retires.
His retirement income will start the day he retires. He could earn 7 percent on savings during
retirement period. a. How much must your father have in his retirement account during retirement?
b. Assume, your father can earn 10 percent from now till retirement, how much must he save each
year to meet his retirement goals?

3. John and Jessica are saving for their child’s education. Their daughter is currently eight years old
and will be entering college 10 years from now (t = 10). They estimated college cost would be
$20,000 every year. They expect their daughter to graduate in four years, and that all yearly college
fees will be due at the beginning of each year. Their investment account is expected to have an
annual return of 12 percent. a. What is the amount they must save for their daughter while she
starts college? b. How much cash they have to save each year to meet their child’s anticipated
college costs?

4. You intend to purchase a 10-year, $1,000 face value bond that pays coupon every 6 months with
a coupon rate 12%. If your required rate of return is 10 percent,, how much should you be willing to
pay for this bond?

5. A bond matures in 12 years and pays an 8 percent annual coupon. The bond currently sells for
$965. a. What is the bond’s current yield? b. What is the yield to maturity?

6. A share of stock has recently paid $5 dividend per share. The dividend is expected to grow at a 20
percent for the next 10 years, then at a 15 percent rate for 10 more years, and then at a constant
rate of 8 percent forever. If investors require a 10 percent return on this stock, what is its current
price?

7. The Jones Company has decided to undertake a large project. Consequently, there is a need for
additional funds. The financial manager plans to issue preferred stock with a annual dividend of $5
per share with a par value of $30. If the preferred shareholders have 20 percent required return on
this stock, what should be the stock’s market value?

8. You have just turned 24, and you intend to start saving for your retirement. You plan to retire in
36 years when you will turn 60. During your retirement you would like to have an annual income of
$120,000 per year for the next 20 years until you’re 80. Assumptions:  The relevant earning rate is 9
percent for any investment.  You’ll deposit cash for retirement at the end of each year and the last
payment on the day you retire.  You make the first withdrawal when you retire and the last
withdrawal at the beginning of your 80th birth year. a. Calculate how much has to be in your account
before the first withdrawal at age 60 b. Calculate how much would have to be saved annually till age
60 in order to finance your retirement income and to fill that account.