Deck 4: Understanding Money and Its Management

Question 1

Your bank calculates the interest based on 12.5% APR on your credit card balance. Suppose that your current
outstanding balance is $2,000 and you skip payments for two months. What would be the total balance two
months from now?

Answer 1

Question 2

Suppose you borrowed $10,000 at an interest rate of 12%, compounded monthly over 36 months. At the end of
the first year (after 12 payments), you want to negotiate with the bank to pay off the remainder of the loan in 8
equal quarterly payments. What is the amount of this quarterly payment, if the interest rate and compounding
frequency remain the same?

Answer 2

Question 3

Henry Jones is planning to retire in 15 years. He wishes to deposit an equal amount (A) every 6 months until he
retires so that, beginning one year following his retirement, he will receive annual payments of $30,000 for the
next 15 years. Determine the value of A which he should deposit every 6 months if the interest rate is 8%,
compounded semi-annually

Answer 3

Question 4

If the interest rate is 9.5% compounded continuously, what is the required quarterly payment to repay a loan of
$15,000 in four years?

Question 5

You are considering buying a new car worth $15,000. You can finance the car by either withdrawing cash from
you savings account, which earns 8% interest or by borrowing $15,000 from your dealer for four years at 11%.
You could earn $5,635 in interest from your savings account for four years if you left the money in the account.
If you borrow $15,000 from your dealer, you only pay $3,609 in interest over four years, so it makes sense to
borrow for your new car and keep your cash in your savings account. Do you agree or disagree with the above
statement? Justify your reasoning with a numerical calculation. All transactions are monthly.

Question 6

Suppose you deposit $C at the end of each month for 10 years at an interest rate of 12%, compounded
continuously. What equal end-of-year deposit over 10 years would accumulate the same amount at the end of
10 years under the same interest compounding?

Question 7

At what rate of interest, compounded monthly, will an investment double itself in 5 years?

Question 8

You are planning to retire in 10 years. You plan to deposit money at 8% compounded quarterly. What equal
amount of deposit must you make at the end of each quarter until your retirement so that you can make a
withdrawal of $45,000 semiannually over five years after your retirement? Assume that the first withdrawal
occurs at the end of six months after your retirement.

Question 9

What is the equal-payment series for 8 years that is equivalent to a payment series starting with $15,000 at the
end of the first year and decreasing by $2,000 each year over next seven year? Interest is 9% compounded
monthly.

Question 10

Two financing options are being offered in purchasing a vehicle:
• Option 1: cash purchase at $20,500.
• Option 2: Debt purchase - Purchase the vehicle at the price of $22,600 and finance it over three years with
equal monthly payments at 3.5% APR.
Which option is more economical at an interest rate of 6% compounded monthly?

Question 11

A building is priced at $100,000. If you make a down payment in the amount of $30,000 and want to make a
$1,000 monthly payment, how many months will it take to pay for the building? Interest is charged at a rate of
12%, compounded monthly.

Question 12

A series of equal semi-annual payments of $1,000 for 3 years is equivalent to what present amount at an interest
rate of 12%, compounded annually?

Question 13

Suppose your savings account pays 9% interest compounded quarterly. If you deposit $10,000 for two years,
how much would you have on your account?

Question 14

Suppose you deposit $1,000 at the end of each quarter for 5 years at an interest of 8% compounded
continuously. What equal end-of-year deposit over 5 years would accumulate the same amount at the end of 5
years under the same interest compounding (8%, compounded continuously)? To answer the question, which of
the following is correct?

Question 15

You obtained a loan of $20,000 to finance an automobile. Based on a 2-year financing term, your monthly
payment was $922.90. Immediately after making the 12th payment, you decide to pay off the loan in lump sum.
What should this lump sum amount be?