A Few TVM Questions

sumstuf

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Joined
Apr 8, 2010
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These questions look easy but I can't figure how to find the answers.

1. You borrowed $30,000 to go to school. The bank agreed that you could repay the loan by making 180 equal monthly payments, starting 12 months from now. If the bank is charging 8% per year compounded semi-annually, what are your monthly payments?

a) $284.45
b) $305.65
c) $307.65
d) $310.09
e) $334.90

I don't know how to factor in the fact that it starts 12 months from now instead of today. I know what numbers to put in the calculator if I started paying monthly payments now but not 12 months from now. The answer is B but I don't know how to calculate it.

2. You purchase a 10 year, 1,000 face value bond that has a 6% coupon rate (the coupons are paid semi-annually). The yield to maturity on the bond is 6% per year compounded semi-annually. Five years later you decide to sell the bond for $1,050. What is your average annual rate of return on this investment? Express your answer as a rate per year compounded semi-annually.

a) 3.00%
b) 3.42%
c) 6.47%
d) 6.86%
e) 7.14%

The answer is D but still don't know how to calculate it.

3. The Really Expensive Bank Inc is offering a special deal. You may borrow $1,000 today and make payments of $20 per week, at the end of each week for the next 2 years to pay off the loan. What is the effective annual rate of interest is charging you?

a) 0.15%
b) 1.63%
c) 2.31%
d) 65.7%
e) 131.4%

The answer is E. Still very confusing here.

Please help.
 
sumstuf said:
1. You borrowed $30,000 to go to school. The bank agreed that you could repay the loan by making 180 equal monthly payments, starting 12 months from now. If the bank is charging 8% per year compounded semi-annually, what are your monthly payments?
a) $284.45
b) $305.65
c) $307.65
d) $310.09
e) $334.90
I don't know how to factor in the fact that it starts 12 months from now instead of today. I know what numbers to put in the calculator if I started paying monthly payments now but not 12 months from now. The answer is B but I don't know how to calculate it.
Are you also aware that the rate (let r = rate) to be used is:
(1 + r)^12 = (1.04)^2
Can you solve that for r?
 
If I solve for r it is equal to 0.006558. I still don't get it. I know I have to change the 8% compounded semi-annually to compounded monthly rate. But I still don't know how to factor in the fact that payment starts 12 months from today. If it started today I can just put in the numbers in my calculator as n= 180, r= (rate compounded monthly), PV= 30000, FV= 0, and just solve for PMT. But how do I factor in the 12 month delay in payments?
 
sumstuf said:
If I solve for r it is equal to 0.006558. I still don't get it. I know I have to change the 8% compounded semi-annually to compounded monthly rate. But I still don't know how to factor in the fact that payment starts 12 months from today. If it started today I can just put in the numbers in my calculator as n= 180, r= (rate compounded monthly), PV= 30000, FV= 0, and just solve for PMT. But how do I factor in the 12 month delay in payments?
Your r calculation is correct; I was simply trying to see "where you're at"!

Your next step is calculate the FV of 30000 for 11 months: 30000(1.006558)^11 = 32235.52

The 1st payment is one month later (12th month); so enter in your calculator:
PV = 32235.52
n = 180
r = .006558
FV = 0

HOKAY?
 
Thanks Denis.

I am still trying to figure out question 2. Can anyone help?
 
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