Finals Problem Set #3.

Mathematics of Finance
Instructions: Solve the following problem using the proper solving format. Show your complete solution, write
legibly, and box your final answers. Failure to follow the instructions will have a 50% deduction on your final
score.
Simple Interest
1. You borrow $500 from a family member and agree to pay it back in 6 months. Because you are part of the family, you
are only being charged simple interest at the rate of 0.5% per month. How much will you owe after 6 months? How much
is the interest?

2. A company invested $450,000 ten years ago in a new technology that is now worth $1,000,000.What rate of interest did
the company earn on a simple interest basis?

3. A woman borrowed $2000 and agreed to repay it at the end of 3 years, together with 10% simple interest per year. How
much will she pay 3 years hence?

4. Simple interest of $190.67 is owed on a loan of $550 after four years and four months. What is the annual interest rate?

5. Your electric bill is $132. You are charged 9% simple interest for late payments. How much do you owe if you pay the
bill 1 month past the due date?

Compound Interest
6. Compare the interest earned by P dollars at i% per year simple interest with that earned by the
same amount P for five years at i% compounded annually

7. You have just invested a one-time amount of $5,000 in a stock-based mutual fund. This fund should
earn (on average) 9% per year over a long period of time. How much will your investment be worth in 35 years?

8. Use the rule of 72 to determine how long it takes to accumulate $10,000 in a savings account when P = $5,000 and i =
10% per year.

9. In 1803, Napoleon sold the Louisiana Territory to the United States for $0.04 per acre. In 2014, the average value of an
acre at this location is $10,000. What annual compounded percentage increase in value of an acre of land has been
experienced?

10. In 1885, first-class postage for a one-ounce letter cost $0.02. The same postage in 2015 costs $0.49.
What compounded annual increase in the cost of first class postage has been experienced over this period of time?

11. In considering a 5-year budget for remodeling a testing laboratory, it is expected that $10,000 each will be spent at the
end of the first and third years, but no money will be spent at the end of the second and fourth years. How much money
can be spent at the end of the fifth year if an initial sum of $25,000 for this purpose is deposited in a bank that pays an
interest of 6% compounded annually?

12. In considering a 5-year budget for remodeling a testing laboratory, it is expected that $10,000 each will be spent at the
end of the first and third years, but no money will be spent at the end of the second and fourth years. How much money
can be spent at the end of the fifth year if an initial sum of $25,000 for this purpose is deposited in a bank that pays an
interest of 6% compounded annually?

13. You bought 100 shares of GE stock for $25,000 on October 23, 2011. Your intention is to keep the stock until it
doubles in value. If you expect 12% annual growth for GE stock, how many years do you expect to hold onto the stock?
Compare your answer using Rule of 72.

14. If you want to withdraw $20,000 at the end of two years and $55,000 at the end of four years, how much should you
deposit now into an account that pays 12% interest compounded annually?
Annuity
15. The value of an investment comes from its cash flows. Let’s say you are intent on receiving $45,000 per
year, starting at the end of year one and continuing over 10 years . A lump-sum of $380,000 invested now (year 0) will
allow you to receive your desired annual amount. What interest rate is required to make this happen?

16. One of life’s great lessons is to start early and save all the money you can! If you save $2 today and $2 each and every
day thereafter until you are 60 years old (say $730 per year for 35 years), how much money will you accumulate if the
annual interest rate is 7%?

17. You want to save the down payment required to purchase a vacation home at the end of 4 years. If the required down
payments is $75,000 and you can earn 6% a year on your savings account, how much do you need to set aside at the end
of each year for the next 4 years?

18. Your monthly mortgage payment (principal plus interest) is $1,500. If you have a 30-year loan with a fixed interest
rate of 0.5% per month, how much did you borrow from the bank to purchase your house?

19. Bill Mitselfik borrowed $10,000 to be repaid in quarterly installments over the next five years. The interest rate he is
being charged is 12% per year compounded quarterly. What is his quarterly payment?

Effective Interest Rate

21. One bank advertises an interest rate of 6.6%, compounded quarterly, on a certificate of deposit. Another bank
advertises an interest rate of 6.25%, compounded monthly. Which investment has the higher annual yield?

22. Which investment has the higher annual yield, one earning 7.8% compounded monthly or one earning 7.5%
compounded daily?

23. Beth Chipman has money in a savings account that earns an annual interest rate of 3%, compounded quarterly. What
is the effective rate of interest on Beth’s account? Round to the nearest hundredth of a percent.

Loan Payoffs
24. Angela Montery has a 5-year car loan for a Jeep Wrangler at an annual interest rate of 6.3% and a monthly payment of
$603.50. After 3_years, Angela decides to purchase a new car. What is the payoff on Angela’s loan?

25. Suppose you have a 4-year car loan at an annual interest rate of 8.9% and a monthly payment of $303.52. After
3_years, you decide to purchase a new car. What is the payoff on your loan?

26. Iris Chung has a 15-year mortgage loan at an annual interest rate of 7.25%. After making payments of $672.39 for
4_years, Iris decides to sell her home. What is the loan payoff?

27. After making payments of $736.98 for 10 years on your 30-year loan at 6.75%, you decide to sell your home. What is
the loan payoff?

Mutual Funds
28. A mutual fund has total assets of $50,000,000 and total liabilities of $5,000,000. There are 2,000,000 shares
outstanding. Find the net asset value of the mutual fund.

29. A mutual fund has total assets of $25,000,000 and total liabilities of $250,000. There are 1,500,000 shares
outstanding. Find the net asset value of the mutual fund.

30. A mutual fund has $500 million worth of stock, $500,000 in cash, and $1 million in other assets. The fund’s total
liabilities amount to $2 million. There are 10 million shares outstanding. You invest $12,000 in this fund. How many
shares are you purchasing?