# Money and Points Essay Sample

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**5** - Word count:
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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 adds up to 100. Question 1

(5 points) Qin deposits his first paycheck in the bank. The annual interest rate is 12%, but interest is compounded quarterly.

The EAR is: Your Answer| | Score| Explanation|

12.55| ✔| 5.00| Correct. You know compounding and how to calculate EAR.| Total| | 5.00 / 5.00| |

Question Explanation

Basics of compounding; mechanics.

Question 2

(5 points) Ranjit began setting aside $6,000 per year in a mutual fund at the age of 25. He has turned 34, and has just made a deposit. The mutual fund has returned 6.5% annually. How much does Rajit have in his account today? Your Answer| | Score| Explanation|

80967| ✔| 5.00| Correct. You know how to calculate the FV of an annuity.| Total| | 5.00 / 5.00| |

Question Explanation

Basic FV calculation. He should have a minimum of $60,000. Why? Question 3

(5 points) Dominique has just turned 65 and she has deposited her annual payment of $20,000 into her retirement account. She made her first such saving deposit into this fund on her 35th 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 5.5%? (Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 3

You entered:

Your Answer| | Score| Explanation|

1448710| ✘| 0.00| |

Total| | 0.00 / 5.00| |

Question Explanation

FV of an annuity calculation. Draw a time line. The minimum she has is $620,000. Why? Question 4

(5 points) Marcel has just graduated from college and has found a job that will pay him $25,000 per year at the end of each year, but the job is only for 5 years. He is not worried about that because he plans to do an MBA after gaining 5 years experience anyway. What is the value today of his 5-year salary assuming that the interest rate is 3%? Your Answer| | Score| Explanation|

114493| ✔| 5.00| Correct. You know the mechanics of calculating the PV of an annuity.| Total| | 5.00 / 5.00| |

Question Explanation

Mechanics of the calculation of the PV of an annuity. The maximum value of his entire 5-year salary is $125,000. Why? Question 5

(10 points) Rachna is considering a life insurance plan that will require her to pay a premium of $200 every year for the next 40 years. She wants to make sure that she is able to make this payment and wants to put away a lump sum today in

her bank to cover all future payments. How much would she need to deposit in her bank if the annual

You entered:

Your Answer| | Score| Explanation|

3959| ✔| 10.00| Correct. You know how to calculate the PV of an annuity.| Total| | 10.00 / 10.00| |

Question Explanation

PV of an annuity. Cannot be more than $8,000. Why?

Question 6

(10 points) Melanie and Stephen Jackson are purchasing their first house. The house costs $360,000. They have put a 20 percent 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 5.25% APR with monthly payments. How much will the Jacksons’ first monthly payment be? Your Answer| | Score| Explanation|

1590| ✔| 10.00| Correct. You know how to do a PMT calculation.| Total| | 10.00 / 10.00| |

Question Explanation

This payment is a simple PMT calculation; the amount has to be more than $800 per month. Why? Question 7

(15 points) Baako has invested $75,000 in a trust fund at 9% for his child’s college education. His child will draw $30,000 per year for four years, starting at the end of year 7. What will be the amount that will be left over in the education fund at the end of year 10 (just after the child has withdrawn the fourth time)?(Enter just the number without the $ sign or a comma; round off decimals.) Answer for Question 7

You entered:

Your Answer| | Score| Explanation|

137103| ✘| 0.00| |

Total| | 0.00 / 15.00| |

Question Explanation

A multi-layer problem, now that you know how to calculate basic stuff. Draw a timeline; it is key. Remember a spreadsheet is a time line. Question 8

(15 points) Two years ago Abilia purchased a $10,000 car; she paid $2000 down and borrowed the rest. She took a fixed rate 60-month installment loan at a stated rate of 8% 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 6% per year for 3 years. Should Abilia refinance her loan? How much will she save per month for the next three years if she decides to refinance? Your Answer| | Score| Explanation|

(yes, 7)| ✘| 0.00| Right decision, but amount needs to be recalculated carefully.| Total| | 0.00 / 15.00| |

Question Explanation

This again is a multi-layer question. Understanding the problem first is the key, and using time lines is the main way you will. Question 9

(15 points) Two years ago, you purchased a $20,000 car, putting $4,000 down and borrowing the rest. Your loan was a 48-month fixed rate loan at a stated rate of 6% per year.You paid a non-refundable application fee of $100 at that time in cash. Interest rates have fallen during the last two years and a new bank now offers to refinance your car by lending you the balance due at a stated rate of 4% per year. You will use the proceeds of this loan to pay off the old loan. Suppose the new loan requires a $200 non-refundable application fee. Given all this information, should you refinance? How much do you gain/lose if you do? Your Answer| | Score| Explanation|

(no, lose 25)| ✔| 15.00| Correct decision, and calculation correct. You are thinking right.| 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 $500 now and $200 a month for each of the next 36 months (the first $200 payment occurs 1 month from today). After 36 months you may buy the car for $8,000. (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 6%. What is the net cost today of the cheapest option? (Enter just the number without the $ sign or a comma; round off decimals.Since this asks for a cost, you just enter the number without a negative sign.) Answer for Question 10

You entered:

Your Answer| | Score| Explanation|

| ✘| 0.00| |

Total| | 0.00 / 15.00| |

Question Explanation

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