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Chapter 5, Solutions        Cornett, Adair, and Nofsinger

SOLUTION:

a. Show a time line of when the loans will be taken.

Cash Flows   \$2,625     \$3,500     \$5,500    \$5,500

Period0      6.8%16.8%2 6.8%3        6.8% 4 6.8%   5 years

b. What will be the loan balance when Gavin graduates after his fourth year of school?

Each payment needs to be moved forward with 6.8% interest to the middle of years 4 and 5 to calculate the outstanding accrued loan balance as of the date payments are set to begin:

FV4 = \$2,625 × (1.068)4 + \$3,500 × (1.068)3 + \$5,500 × (1.068)2 + \$5,500 × (1.068)1

FV4 = \$3,415.19 + \$4,263.65 + \$6,273.43 + \$5,874.00 = \$19,826.27

c. What is the loan balance six months after graduation?

Each payment needs to be moved forward with 6.8% interest to the middle of years 4 and 5 to calculate the outstanding accrued loan balance as of the date payments are set to begin:

FV4.5= \$2,625 × (1.068)4.5 + \$3,500 × (1.068)3.5 + \$5,500 × (1.068)2.5 + \$5,500 × (1.068)1.5

FV4.5= \$3,529.39 + \$4,406.23 + \$6,483.22 + \$6,070.43 = \$20,489.27

Note, this can be checked by multiplying \$19,826.27 by 1.0680.5.

d. Using the standard repayment plan and a 6.8 percent APR interest rate, compute the monthly payments Gavin owes after the grace period.

Using equation 5-9, the monthly payments will be:

Combined Chapter 4 and Chapter 5 Problems

4&5-1 Future Value Consider that you are 35 years old and have just changed to a new job. You have \$80,000 in the retirement plan from your former employer.  You can roll that money into the retirement plan of the new employer.  You will also contribute \$5,000 each year into your new employer’s plan.  If the rolled-over money and the new contributions

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