UNIVERSIDAD DEL PACÍFICO

Foundations of Finance
Academic Term: 2019- I
Professors: Alexei Álvarez TAs: Carlos Calderón / Juan Raunelli
Juan Manuel de los Ríos José Carlos Cortés / Rodrigo Reyna
Fernando Bresciani Percy Vega / Maria Alejandra Chumbe
Carlos Arias Renzo Morales / Ariel Pajuelo
Jeferson Carbajal Eduardo Córdova / Gonzalo Vidalón

TEST 1 - A, B, E

1. Assuming an effective monthly rate of 1%, please answer the following questions:
a. Fernando has inherited $200,000 from his father. The bank offers him monthly payments for the
following 35 years if he deposits the $200,000. What is the monthly payment expected by
Fernando? (2 points)
b. Renato has just turned 30 and his monthly salary is $1,000. His boss offers him a monthly raise of
0.1%. If Renato saves 60% of his salary, how much will he have saved to the moment he turns 65?
(2 points)
c. Joseph deposits $2,000 monthly on the saving account of his daughter. He is willing to contribute
until the fund reaches $250,000. If currently the fund is at $80,000, how long will he have to
continue contributing to the fund? (2 points)

2. Assume that all payments are made at the end of the period. Answer the following questions:
a. Alejandro wants to purchase a car valued at $ 40,000, so he decides to solicit a vehicle loan. The
bank tells Alejandro that it will lend him 80% of the total value of the vehicle for a term of 2 years at
a 7.5% annual rate, compounded monthly. If Alejandro wants to pay a fixed monthly fee, how much
will he have to pay for the loan? Assume that the fee will be paid at the end of the month. (2 points)
b. After discovering the value of the monthly payment, Alejandro realizes he cannot afford the loan.
Therefore, he tells the bank that he would be willing to pay a monthly fee of $ 775, at most, under
the same conditions. Calculate the maximum value of the vehicle that Alejandro can buy given the
new monthly payment. (2 points)

3. Hugo is planning on going to the music festival Lolupalooza in Chicago, on the end of August 2021. For this
purpose, he will make a deposit on the bank with all his savings now (April 2019). He will also make a
monthly contribution to his saving account of $40, starting at the end of May 2019 and ending at the end of
August 2021. His uncle will deposit $50 every quarter on the bank in order to help him, starting at the end of
June 2019, the second at September 2019 and so on until June 2021.

a. How much money will Hugo have accumulated until August 2021? Assume an EAR of 12%. (2.5 points)
Hugo will purchase the tickets for the festival on August 2021 for $1000. He also knows the plane tickets
cost $800 and will pay for them on August 2021.

b. How much money available would Hugo have for “other expenses” after paying for plane and festival
tickets? Assume an EAR of 12% and that those “other expenses” would be paid on September 2021.
(1.5 points)
 c. If Hugo could pay for all the travel expenses (plane tickets, festival tickets, “other expenses”) on three
equal monthly payments, from August 2021 up to October 2021, what would be the maximum payment
he would be able to afford under this credit plan? (1 point)

4. Cristina is a finance professional and is looking for the best investment options. She has been able to
extract information regarding the returns for term deposits from banks and different financial entities. Her
investment horizon is 3 years.

Rate Term of the deposit

Banco Misti Monthly interest rate of 0.5% compounded bimonthly 1 year
Financiera
Semiannual interest rate of 8% compounded weekly 2 years
Limo
Caja Pisco Quarterly interest rate of 4.5% compounded annually 3 years
Cooperativa
Weekly interest rate of 2.2% compounded daily 1.5 years
UP
* The term of the deposit states the minimum amount of time that the investor has to hold their
investment in the financial entity. If the term of the deposit ends, the investor is going to reinvest
in the deposit at the same rate. You can’t move deposits from one entity to another during the
investment horizon.

a. What alternative is Cristina going to choose, and which would be the worst option given her investment
horizon? (3 points)
b. How would your answer in a) change if Cristina’s investment horizon shortens to 2 years? (2 points)