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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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