EXERCISE

CHAPTER 4:
17.
First National Bank:
EAR = (1+ r/m)^m – 1 = (1+11.2%/12)^12 – 1 = 11.79%
First United Bank:
EAR = (1+11.4%/2)^2 – 1 = 11.72%
 We choose First United Bank to go for a new loan
18.
The price of bottle case after discounting = 120 x 90% = 108
Because the cash flows are an annuity due so
PVA = (1+r) x C x ({1 – [1/(1+r)t]}/r)
108 = (1+r) x 10 x ({1 – [1/(1+r)12]}/r)
 r = 0.0198 or 1.98%
 APR = r x 52 = 1.0277 = 102.77%
 EAR = (1+r)^m = (1+0.0198)^52 – 1 = 1.7668 or 176.68%
19.
PVA = C x ({1 – [1/(1+r)t]}/r)
21500 = 700 x ({1 – [1/(1+1.3%)t]}/1.3%)
 t = 39.457 months
20.
The interest rate = 4/3 – 1 = 0.333 or 33.3%
APR = r x m = 0.333 x 52 = 17.333 or 1733.33%
EAR = (1 + 0.33)^52 – 1 = 313,916,515.7%
21.
a. FV = PV x (1+r)^t= 1000 x (1 + 9%)^6 = 1677.1
b. FV = 1000 x (1 + 9%/2)^6x2 = 1695.88
c. FV = 1000 x (1 + 9%/12)^6x12 = 1712.55
d. FV = 1000 x e^rt = 1000 x e^9%x6 = 1716.006
22.
First Simple Bank:
The simple interest rate over 10 years = 5% x 10 = 50%
First Complex Bank
The compounded rate = 50% = (1 + r)^10 - 1  r = 4.138%
23.
The future value of The Stock account:
FVA = C x {[(1+r)t -1]/r} = 800 x {[(1+11%/12)12x30 -1]/(11%/20)} = 2,243,615.789
The Bond Account:
FVA = C x ({1 – [1/(1+r)t]}/r) = 350 x {[(1+6%/12)12x30 -1]/(6%/12)} = 351,580.26
 The total amount of saved money = 2,243,615.789 + 351,580.26 = 2,595,196.05
 PVA = 2,595,196.05 = C x ({1 – [1/(1+r)t]}/r) = C x 129.564
 C = 2,595,196.05 / 129.564 = 20,030.14 per month
24.