Finance Practice Problems with Answers

Finance Practice Problems Ordinary Annuity (Sinking Fund ) Payment at the end of each period ⎡ ⎛ r ⎞n t ⎤ ⎢ ⎜⎝ 1 + n ⎟⎠ − 1 ⎥ F = R⎢ ⎥ r ⎢ ⎥ ⎢⎣ ⎥⎦ n Example: Joe deposits $22,000 at the end of each year for 7 years, in an account paying 6 % compounded annually, how much will he have on deposit after 7 years? Ans: $184,664.43 Practice 1: Mina deposits $500 at the end of each month for 10 years, in an account paying 5% compounded monthly, how much will she have on deposit after 10 years? Practice 2: Napoleon deposits $1,200 at the end of each quarter for 10 years, in an account paying 8 % compounded quarterly, how much will he have on deposit after 10 years? Ans: $72,482.38 Practice 3-a: Jose wants to retire in twenty years and for this purpose he is depositing $200 at the end of each month in a sinking fund that pays 7.2% compounded monthly. If he will be doing this for twenty years, then how much money will be there for him when he retires? Ans: $106,752.47 Practice 3-b: If Joe wants to accumulate $130,000 in the twenty years period, and then what interest rate would provide that amount? Ans: 8.79% Practice 4: Find the amount of payment to be Joe needs to make into a sinking fund every quarter to accumulate $62,000 after 6 years: Knowing that money earns 8 % compounded quarterly. Ans: $2,038.01 Practice 5: Find the amount of payment to be made into a sinking fund to accumulate $75,000 for 4 and half year: money earns 6% compounded semiannually. Ans: $7,382.54 1 Annuity Due n t +1 ⎡⎛ r ⎞ ⎢ ⎜⎝ 1 + n ⎟⎠ F = R⎢ r ⎢ ⎢⎣ n ⎤ − 1⎥ ⎥−R ⎥ ⎥⎦ Payment at the beginning of each period Example: Joe deposits $500 at the beginning of each quarter end for 7 years, in an account paying 12 % compounded quarterly, how much will he have on deposit after 7 years? Ans: $22,109.43 Example: Joe deposits $500 at the end of each quarter for 7 years, in an account paying 12 % compounded quarterly, how much will he have on deposit after 7 years? Ans: $21,465.46 Practice 1: Cesar deposits $16,000 at the beginning of each year for 8 years, in an account paying 4.7 % compounded annually, how much will he have on deposit after 8 years? Ans: $158,260.36 Practice2: Cesar deposits $100 at the beginning of each quarter for 30 years, in an account paying 4 % compounded annually, how much will he have on deposit after 8 years? Ans: Practice 3: Find the amount of payment to be Joe needs to make into an annuity fund every quarter to accumulate $62,000 after 6 years: Knowing that money earns 8 % compounded quarterly. Ans: Practice 4: Find the amount of payment to be made into an annuity fund to accumulate $75,000 for 4 and half year: money earns 6% compounded semiannually. Ans: Amortization ⎡ ⎤ r ⎢ ⎥ n R = P⎢ −n t ⎥ ⎢1 − ⎛1 + r ⎞ ⎥ ⎜ ⎟ ⎣⎢ ⎝ n ⎠ ⎦⎥ n = Compounding Period P = Loan Amount R = Periodic Payment r = Interest Rate t = Time Example (4-year payment): A car costs $22,000. After a down payment of $4,000, the balance will be paid off in 48 equal monthly payments with the interest of 12 % per year on the unpaid balance. Find the amount of each payment. Ans: $474.01 2 Practice 1 (5-year term): A car costs $22,000. After a down payment of $4,000, the balance will be paid off in 60equal monthly payments with the interest of 12 % per year on the unpaid balance. Find the amount of each payment. Ans: Practice 2 (6-year term):A car costs $22,000. After a down payment of $4,000, the balance will be paid off in 72 equal monthly payments with the interest of 12 % per year on the unpaid balance. Find the amount of each payment. Ans: Practice 3 (Bad credit): A car costs $22,000. After a down payment of $4,000, the balance will be paid off in 48 equal monthly payments with the interest of 18% per year on the unpaid balance. Find the amount of each payment. Ans: Practice 4 (Good Credit and 4-year term): A car costs $22,000. After a down payment of $4,000, the balance will be paid off in 48 equal monthly payments with the interest of 6% per year on the unpaid balance. Find the amount of each payment. Ans: Practice 5 (Bad Credit and 5-year term): A car costs $22,000. After a down payment of $4,000, the balance will be paid off in 60 equal monthly payments with the interest of 18% per year on the unpaid balance. Find the amount of each payment. Ans: Practice 6 (Bad Credit and 7-year term): A car costs $22,000. After a down payment of $4,000, the balance will be paid off in 72 equal monthly payments with the interest of 18% per year on the unpaid balance. Find the amount of each payment. Ans: Additional Problems 1) How many days will it take for a sum of $1,500 to earn $25 interest if it is deposited in a bank paying 5% a year?(Use a 365day a year.) Ans: 121.67 days 2) How long will it take an investment of $5,000 to triple if the investment earns interest at the rate of 8 % a year compounded quarterly? Ans: 13.87 years 3 3) Today, the price of a gallon of milk is $4.25, assuming inflation rate to be 4.5 % a year. What will be the price of a gallon of milk 10 years from now? Ans: $6.67 4) Five and half years ago, Chris invested $10,000 in a retirement fund that grew at the rate of 10.82 % per year compounded quarterly. What is his account worth today? Ans: $17,989.33 5) 5 years ago, Johnny Cash invested a sum of money in a saving account with interest of 8 % per year compounded quarterly. His investment is now worth $22,289.22. How much did he originally invest? Ans: $15,000 6). Find the future value of ordinary annuity for $150 per month for 15 years at 10 % per year compounded monthly? Ans: $62,170.55 7) Find the present value of ordinary annuity for $150 a month at 8 % per year compounded quarterly for 10 years? Ans: $4,103.32 8) If you contribute $5,000 a year into a trust account, then how much will be in the account after 25 years if the account earns interest at the rate of 8.5 % per year compounded yearly? Ans: $38,433.81 9) Pope invested only $24,000 in a retirement fund 5 years ago. Today his investment is worth $34616. Find the effective annual rate of return on his investment over 5-yr period. Ans: 10) Find the rate of interest per year compounded on a daily basis that is equivalent to 9.6 % per year compounded monthly. Ans: 11) If $54,000 is invested at an interest rate of 9% for 7.5 years compounded continuously, then find its future value. Ans: $106,057.78 4 12) Find the monthly house payments for a loan of 188,000 at 5.74% for 15 years Ans: $2,122.91 13) Find the future value of an annuity of $672 deposited at the beginning of each quarter for 7 years at 8% compounded quarterly. Ans: $24,898.41 14) A company has ordered 20 new PCs at a cost of $1800 each. They will not be delivered for 5 months. What amount should the firm deposit in an account paying 8.1% to have enough money to pay for them? Ans: $34,824.67 15) A pack-a-day smoker spends about $120 per month on cigarettes. Suppose the smoker invests that amount at the end of each month in a savings account at 6.7 % compounded monthly. What would the account be worth after 45 years? Ans: $413,061.41 16) The Blues Clues family bought a house for $315,000. they paid $20,000 down and took out a 30-year mortgage for the balance at 7%. Find their monthly rent. Ans: $1,962.64 17) Find the total interest Blues Clues family will pay. Ans: $391,550.4 18) Find the amount of each payment that must be paid into a sinking fund to accumulate $ 6,000 at 8% compounded monthly for 3 years. Ans: $148.02 19) If money can be borrowed at 8 % compound monthly, which one is larger: $10,000 now or $15,000 in 5 years? Use present value to decider. Ans: $15,000 in 5 years 20. One of us classmates needs to borrow $18,000 for 1 year. He has been offered a loan with interest compounded monthly and a compound amount of $19,952.42. Find the rate. Ans: 10.34% 5 21) Billy Jean King deposited $6500 in an account paying 7.5 %compounded quarterly. After 3 years the rate drops to 4% compounded semiannually. Find the amount in her account at the end of 7 years. Ans: $9,517.58 22) For one year, a student loan of $52,000 at 9% compounded semiannually resulted in a maturity value of $5,934.06. Ans:1.96 year, 1yr,11months 23) Bobby Cash deposited $10,000 at 8% compounded quarterly. Two years after she makes the first deposit, he adds another $20,000, also at 8% rate compounded quarterly. What total amount will he have 4 years after his first deposit? Ans: $37,161.04 24) Bobby Cash deposited $10,000 at 8% compounded quarterly. Two years after she makes the first deposit, he adds another $20,000, also at 8% rate compounded quarterly. What total amount will he have 6 years after his first deposit? Ans: $43540.08 25). John and Jill have $20,000 cash for the down payment of a house and they can afford a 15-year mortgage payment of $2,500/month. If the best mortgage rate that they can get is 7.5% then what will be the most affordable home that they can buy by their current budget plan? Ans:$269,683.58 + 20,000 = $289,683.57 = $290,000 26) Adam and Eve need to borrow $115,000 to purchase a cave and are debating whether they should use a 20-year mortgage or 30-year mortgage. They also want to know the effect of two interest rates, a 6% and 8%, on a) Monthly payment b) Total cost and c) Total interest paid a) Monthly payment Interest rate Term of the mortgage 20 years 30 years 6% $823.89 $690.00 8% $961.40 844.10 b) Total cost Interest rate Term of the mortgage 20 years 30 years 6% $197,616.60 $248,400 8% $232,736 $303,876 c) Total interest paid Interest rate Term of the mortgage 20 years 30 years 6% $82,616 $133,400 8% $117,736 $188,876 6