Chapter 5, Solutions Cornett, Adair, and Nofsinger

LG85-33 Annuity Interest Rate What annual interest rate would you need to earn if you wanted a $1,000 per month contribution to grow to $75,000 in 5 years?

Use equation 5-2 and solve for i:

Now convert the monthly interest rate to an annual rate by multiplying by 12 which yields 8.78%.

or TVM calculator: N=60, PV=0, PMT=-1,000, FV=75,000, CPT I = 0.732%

LG85-34 Annuity Interest Rate What annual interest rate would you need to earn if you wanted a $500 per month contribution to grow to $45,000 in 6 years?

Use equation 5-2 and solve for i:

Now convert the monthly interest rate to an annual rate by multiplying by 12 which yields 7.30%.

or TVM calculator: N=72, PV=0, PMT=-500, FV=45,000, CPT I = 0.608%

LG95-35 Loan Payments You wish to buy a $25,000 car. The dealer offers you a 4-year loan with a 10 percent APR. What are the monthly payments? How would the payment differ if you paid interest only? What would the consequences of such a decision be?

Use equation 5-9:

If you only paid interest over the length of the loan and your principal balance was repaid at the end of the 48 months, your payment would be $208.33 per month (= $25,000×0.10÷12) for interest only and you would owe $25,000 at the end of the 48 months, too.

LG95-36 Loan Payments You wish to buy a $10,000 dining room set. The furniture store offers you a 3-year loan with a 11 percent APR. What are the monthly payments? How would the payment differ if you paid interest only? What would the consequences of such a decision be?