Unit IV Assignment
This assignment will allow you to demonstrate the following objectives:
- Calculate the annual payment on a loan using the present value of an annuity.
- Use discounting to determine the present value of an annuity.
- Calculate the future value of an annuity and periodic annuity payments.
- Determine the present value of a bond.
Instructions: Answer the questions directly on this document. When you are finished, select “Save As,” and save the document using this format: Student ID_UnitIV. Upload this document to BlackBoard as a .doc, docx, or .rtf file. Show all of your work.
1. Your supervisor has tasked you with evaluating several loans related to a new expansion project. Using the PVIFA table (table 9.4 in the textbook), determine the annual payment on a $365,900, 7% business loan from a commercial bank that is to be amortized over a five-year period. Show your work. Does this payment seem reasonable? Explain.
2. Dan is considering borrowing $489,000 to purchase a new condo. Based on that information, answer the following questions. Show all work.
- Calculate the monthly payment needed to amortize an 5.5% fixed-rate 30-year mortgage loan.
- Calculate the monthly amortization payment if the loan in (a.) was for 15 years instead.
- In a few sentences, explain the effect of a smaller loan period. How does it influence the monthly payment and interest?
3 Use a financial calculator or computer software program to answer the following questions:
- Melanie is trying to save money for retirement and has a future goal of $750,000 at the end of 20 years. Determine the present value of her goal using a discount rate of 12%.
- How would the present value change if the $750,000 is to be received at the end of 15 years instead? Explain the impact and show your work?
4. Your friend Anne is planning to invest $500 each year for five years and will earn a rate of 5.5 percent per year.
- Determine the future value of this annuity due if her first $500 is invested now. Show your work.
- What is the difference between an annuity due and an ordinary annuity? Explain.
5. Jimmy has a bond with a $1,000 face value and a coupon rate of 8.25% paid semiannually. It has a five-year life.
- If investors are willing to accept a 12 percent rate of return on bonds of similar quality, what is the present value or worth of this bond? Show your work.
- What is the impact of paying interest semi-annually rather than annually? Explain.