Feedback Assignment 2Help

You submitted this Assignment on Mon 20 Oct 2014 4:22 PM IST. You got a
score of 80.00 out of 100.00. You can attempt again, if you'd like.
Please read all questions and instructions carefully. Note that you only need to enter answers in
terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars
without decimals and all interest rates with up to two decimals. Read the syllabus for examples.
The points for each question are listed in parentheses at the start of the question, and the total
points for the entire assignment adds up to 100.

Question 1
(5 points) Carlos goes to the bank to take out a personal loan. The stated annual interest rate is
12%, but interest is compounded monthly and he will make monthly payments. The effective
annual interest rate (EAR) of the loan is less than 12%.

Your Answer

Score

Explanation

5.00

Correct. You understand compound

True

False

Total

Correct

5.00 / 5.00

Question Explanation
Basics of compounding.

Question 2
(5 points) Gloria is 35 and trying to plan for retirement. She has put a budget together and plans
to save $4,800 per year, starting at the end of this year, in a retirement fund until she is 65.
Assume that she can make 7% on her account. How much will she have for retirement at age
65?

Your Answer

Score

Explanation

5.00

Correct. You know how to calculate the FV of an

345514

499245

453412

Correct

144000

Total

5.00 / 5.00

Question Explanation
FV of an annuity calculation. She should have a minimum of $144,000. Why?

Question 3
(5 points) Dominique has just turned 65 and she has deposited her annual payment of $20,000
into her retirement account. She made her first such saving deposit into this fund on her 35th
birthday. Dominique has also retired and wants to figure out how much money she has in her
retirement account for her retired life. You are Dominique's friend who knows finance. How much
is Dominique's savings worth today given that the fund has earned an annual return of 5.5%?
(Enter just the number without the $ sign or a comma; round off decimals.)
Answer for Question 3
You entered:

Your Answer

1548389

Correct

Score

Explanation

5.00

Correct. You know how to calculate the FV of an

Total

5.00 / 5.00

Question Explanation
FV of an annuity calculation. Draw a time line. The minimum she has is $620,000. Why?

Question 4
(5 points) Gerard has estimated that he is going to need enough in his retirement fund to
withdraw $75,000 per year beginning on his 66th birthday and for 19 additional years thereafter.
How much will Gerard need in his retirement account at age 65 if his fund is expected to earn an
annual return of 9.5%?

Your Answer

660929

Correct

Score

Explanation

5.00

Correct. You know how to calculate the PV of an

644324

1500000

995733

Total

5.00 / 5.00

Question Explanation
Mecahnics of calculating the PV of an annuity. The amount has to be a maximum of $1,500,000.
Why?

Question 5
(10 points) Rachna is considering a life insurance plan that will require her to pay a premium of
$200 every year for the next 40 years. She wants to make sure that she is able to make this
payment and wants to put away a lump sum today in her bank to cover all future payments. How

much would she need to deposit in her bank if the annual interest rate on her deposit account is
4%? (Enter just the number without the $ sign or a comma; round off decimals.)
Answer for Question 5
You entered:

Your Answer

3959

Total

Correct

Score

Explanation

10.00

Correct. You know how to calculate the PV of

10.00 / 10.00

Question Explanation
PV of an annuity. Cannot be more than $8,000. Why?

Question 6
(10 points) Roxanne is in the market for a new house, and she has found a house she likes that
is selling for $250,000. The down payment on the house is 20% (the amount that the bank
should require you to pay in cash) and Roxanne plans to finance the remainder with a fixed rate
mortgage. The annual rate is 6% and the mortgage is for 15 years, though payments are
monthly. What is the interest component of Roxanne's first monthly payment?

Your Answer

1100

900

800

Score

Explanation

1000

Total

Correct

10.00

Correct. Interest is paid on what you have borrowed

10.00 / 10.00

Question Explanation
This is a simple question, but one which shows your understanding of a loan and what the
interest is a function of.

Question 7
(15 points) Baako has invested $75,000 in a trust fund at 9% for his child's college education. His
child will draw $30,000 per year for four years, starting at the end of year 7. What will be the
amount that will be left over in the education fund at the end of year 10, just after the child has
withdrawn the fourth time? (Enter just the number without the $ sign or a comma; round off
decimals.)
Answer for Question 7
You entered:

Your Answer

Score

Incorrect

Total

0.00

0.00 / 15.00

Question Explanation
A multi-layer problem, now that you know how to calculate basic stuff. Draw a timeline; it is key.
Remember a spreadsheet is a time line.

Question 8
(15 points) Jingfei bought a house 10 years ago for $200,000. Her down payment on the house
was the minimum required 10% at that time she financed the remainder with a 15-year fixed rate

mortgage. The annual interest rate was 10% and she was required to make monthly payments,
and she has just made her 120th payment. A new bank has offered to refinance the remaining
balance on Jingfei's loan and she will have to pay $1,900 per month for the next 5 years, but the
total fees she will have to pay today to get the new loan is $1,000. Should she take the new
offer? How much will she gain or lose in today's dollars if she does? Annual interest rates are still
10%.

Your Answer

Score

Explanation

10.00

You have the right calculation, but the wrong

(yes, gain 712)

(No, loss 324)

(no, loss 614)

Correct

(yes, gain 614)

(no, loss 712)

(yes, gain 324)

Total

10.00 / 15.00

Question Explanation
This is a multi-layer problem; richer and more practical. Always draw time lines.

Question 9
(15 points) You have been living in the house you bought 10 years ago for $300,000. At that
time, you took out a loan for 80% of the house at a fixed rate 15-year loan at an annual stated
rate of 9%. You have just paid off the 120th monthly payment. Interest rates have meanwhile
dropped steadily to 6% per year, and you think it is finally time to refinance the remaining

balance. But there is a catch. The fee to refinance your loan is $4,000. Should you refinance the
remaining balance? How much would you save/lose if you decided to refinance?

Your Answer

Score

Explanation

15.00

Correct. Good job as this is a comp

(no, lose 2331)

(yes, gain 4647)

Correct

(no, lose 1323)

(yes, gain 3300)

(no, lose 2300)

(yes, gain 4053)

Total

15.00 / 15.00

Question Explanation
This is an even more realistic version of the mortgage problem. Think carefully about time lines
and relevant interest rates to make different calculations.

Question 10
(15 points) You are interested in a new Ford Taurus. After visiting your Ford dealer, doing your
research on the best leases available, you have three options. (i) Purchase the car for cash and
receive a $1,500 cash rebate from Dealer A. The price of the car is $15,000. (ii) Lease the car
from Dealer B. Under this option, you pay the dealer $500 now and $200 a month for each of the
next 36 months (the first $200 payment occurs 1 month from today). After 36 months you may
buy the car for $8,000. (iii) Purchase the car from Dealer C who will lend you the entire purchase
price of the car for a zero interest 36-month loan with monthly payments. The car price is

$15,000. Suppose the market interest rate is 6%. What is the net cost today of the cheapest
option? (Enter just the number without the $ sign or a comma; round off decimals.Since this asks
for a cost, you just enter the number without a negative sign.)
Answer for Question 10
You entered:

Your Answer

13500

Total

Correct

Score

Explanation

15.00

Correct. You understand and can solve real life

15.00 / 15.00

Question Explanation
This is a problem that you will face all the time; draw time lines and think through carefully.