ASSIGNMENT WEEK 2 UNIVERSITY OF MICHIGAN INTRODUCTION TO FINANCE.

Introduction to Finance
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Introduction to Finance
by Gautam Kaul

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You submitted this Assignment on Mon 22 Jun 2015 1:28 PM IST. You got a score of 95.00 out of
100.00.
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 add up to 100.

Question 1
(5 points) Carlos goes to the bank to take out a personal loan. The stated annual interest rate is 6%,
but interest is compounded semi-annually and he will make monthly payments. What is the EAR?
Your Answer
Score Explanation
6.00%
3.00%
3.48%
6.09%
Correct 5.00
Correct.
Total
5.00 / 5.00
Question Explanation
Interest rate conversion.

Question 2
(5 points) Gloria is 37 and trying to plan for retirement. She has put a budget together and plans to
save $4,100 per year, starting at the end of this year, in a retirement fund until she is 56. Assume
that she can make 7.0% on her account. How much will she have for retirement at age 56?
Your Answer
Score Explanation
$77,900.00
$101,394.22
$168,081.52
$153,253.76 Correct 5.00
Correct.
Total
5.00 / 5.00
Question Explanation
Basic FV calculation.

Question 3
(5 points) Dominique has just turned 61 and she has deposited her annual payment of $15,000 into
her retirement account. She made her first such saving deposit into this fund on her 32nd 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 3.5%? (Enter
just the number in dollars without the $ sign or a comma and round off decimals.)
You entered:
748662

Your Answer
Score Explanation
748662
Incorrect 0.00
Total
0.00 / 5.00
Question Explanation
FV value of an annuity calculation.

Question 4
(5 points) Gerard has estimated that he is going to need enough in his retirement fund to withdraw
$80,000 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 6.5%?
Your Answer
Score Explanation
$858,776.82
$881,480.58
Correct 5.00
Correct.
$861,515.89
$1,600,000.00
Total
5.00 / 5.00
Question Explanation
Mecahnics of calculating the PV of an annuity.

Question 5
(10 points) Huiling owns a rental property on Main street, but she is considering selling the property
to another real estate investor. In preparation for negotiating a price, Hueling wants to know the
value of the property. The Net Operating Income (NOI) is the cash flow from real estate and the
Cap Rate is the rate, where NOI is rental revenue less all expenses except loan servicing. The
property has an NOI of $11,000 per year. The local real estate market has a cap rate of 7%. What is
a fair price for the property assuming that the building's life is 35 years? (Enter just the number in
dollars without the $ sign or a comma and round off decimals.)
You entered:
142424

Your Answer
Score
Explanation
142424
Correct 10.00
Correct.
Total
10.00 / 10.00
Question Explanation

PV of an annuity

Question 6
(10 points) Melanie and Stephen Jackson are purchasing their first house. The house costs
$210,000. They have put a 15% down payment (that is, an amount that banks should require you to
pay out-of-pocket), but will therefore finance the rest. They are considering a fixed rate 30-year
mortgage at a 5.75% APR with monthly payments. How much will the Jacksons' first monthly
payment be?
Your Answer
Score
Explanation
$1,026.67
$1,051.90
$855.31
$1,041.68
Correct 10.00
Correct.
Total
10.00 / 10.00
Question Explanation
This payment is a simple PMT calculation.

Question 7
(15 points) Abebi, who has just celebrated her 28th birthday, will retire on her 58th birthday, and
she has just set up a retirement plan to pay her income starting on her retirement day, and to
continue paying for 19 more years. Abebi's goal is to receive $110,000 for each of these twenty
years. In creating her retirement account, Abebi has committed to set aside equal investments at the
end of each year, for the next 29 years starting on her 29th birthday. If the annual interest rate is 8%,
how big should Abebi's equal investments be? (Enter just the number in dollars without the $ sign
or a comma and round off decimals.)
You entered:
10388

Your Answer
Score
Explanation
10388
Correct 15.00
Correct.
Total
15.00 / 15.00
Question Explanation
This is a multi-layer problem, now that you know how to calculate basic stuff.

Question 8
(15 points) Two years ago Abilia purchased a $14,000 car; she paid $2,500 down and borrowed the
rest. She took a fixed rate 48-month installment loan at a stated rate of 8.0% per year. Interest rates
have fallen during the last two years and she can refinance her car by borrowing the amount she still
owes on the car at a new fixed rate of 5% per year for 2 years. Should Abilia refinance her loan?
How much will she save per month for the remainder of the loan life if she decides to refinance?

Your Answer
Score
Explanation
Yes, save $8.42 Correct 15.00
Correct.
No, lose $8.42
No, lose $22.10
Yes, save $22.10
Total
15.00 / 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 5 years ago for $300,000. At that time,
you took out a loan for 80% of the house at a fixed rate 20-year loan at an annual stated rate of
9.0%. You have just paid off the 60th monthly payment. Interest rates have meanwhile dropped
steadily to 3.5% 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 $4,500. Should you refinance the remaining
balance? How much would you save/lose if you decided to refinance?
Your Answer
Score
Explanation
Yes, gain $84,658.62 Correct 15.00
Correct.
Yes, gain $89,158.62
No, lose $84,658.62
No, lose $89,158.62
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 $450 now and $175 a month for each of the next 36
months (the first $175 payment occurs 1 month from today). After 36 months you may buy the car
for $8,700. (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 4%. What is the net cost today of the cheapest option? (Enter just the number
in dollars without the $ sign or a comma and round off decimals.)
You entered:
13500

Your Answer
Score
13500
Correct 15.00

Explanation
Correct.

Total
15.00 / 15.00
Question Explanation
This is a problem that you will face often. Please draw time lines and think through carefully the
three alternative options.