In: Economics
1. (10 pts) You just bought a house for $400,000. You put 20% down and financed the rest over 30 years at 6% nominal interest. Assuming equal monthly payments over the term of the loan, what are the monthly payments? What is the effective rate? (Chapter 4)
2. (10 pts) What would you need to invest today in an account that had a nominal rate of 8% compounded quarterly, if you wanted $12,000 in 4 years? What would be the investment required if the account compounded semi-annually? What is the effective rate of each investment? (Chapter 3)
3.
Assuming an 9% interest rate, what is the value of A required to make the present value of the cash flows equal to 0?
1. Price of house = $ 400,000
Down payment = 20%
Loan amount = 0.8 × $400,000 = $ 320,000
Interest rate = 6% compounded monthly
Effective monthly rate = 6/12 = 0.5% per month
Monthly installment = $ A
Monthly installment = $ 1,918.56
2. Let us assume we invest an amount = $ A
Interest rate = 8% compounded quarterly
Time = 4 years
FV = $ 12,000
Effective interest rate
Effective rate of interest = 8.2432% per year
So you are required to deposit $ 8,741.35 today.
Question number 3 i cannot solve because the cash flow diagram is missing.
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