QUESTION

# FIN 534 Week 3 Chapter 4 Solution

This pack of FIN 534 Week 3 Chapter 4 Solution shows the solutions to the following problems:

1. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?2. Which of the following statements is CORRECT?3. Riverside Bank offers to lend you$50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged byRiverside?4. Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting$2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate'strustee) will make 40 more $2,500 payments until a 46th and final payment is made on Steve's 65th birthday. The grandfather set things up this way because he wants Steve to work, not be a "trust fund baby," but he also wants to ensure that Steve is provided for in his old age.Until now, the grandfather has been disappointed with Ed, hence has not given him anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Ed. He will make the first payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much must the grandfather put into Ed's trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?5. John and Daphne are saving for their daughter Ellen's college education. Ellen just turned 10 at (t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and expenses atStateU.are currently$14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 years--if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11).So far, John and Daphne have accumulated $15,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional$5,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Ellen's anticipated college costs?

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