FIN 301

Midterm 1, Review Questions

1. The interest rate on a $10,000 loan is 8% APR compounded quarterly. What is the EAR on this loan? Suppose the loan is to be repaid in three equal installments due 2, 4 and 8 years after the date of the loan. Calculate the size of each payment.

2. J. Peterman Inc. issued a ten-year bond three years ago with a face value of $1,000. The bond makes semi-annual coupon payments, and its coupon rate is 8%. One year ago the yield to maturity on eight-year bonds with the same credit rating was 8%. The current yield to maturity on seven-year bonds with the same risk as the J. Peterman bonds is 10%. What is the current price of J Peterman bonds? If you bought J Peterman bonds one year ago and sold it today, what is your percentage gain (or loss) from the price change?

3. When Celia was born, her dear old Aunt Minnie promised to deposit $1,000 into a savings account bearing a 5% compounded annual rate on each birthday, beginning with her first and ending on the 22nd. Celia has just turned 22 and wants the dough. However, it turns out that dear old (forgetful) Aunt Minnie made no deposits on Celia’s third, fifth, and eleventh birthdays. How much is in the account right now?

4. The interest rate on a $190,000 mortgage loan equals 8.5% APR compounded semi-annually. Monthly payments are calculated using 15-year amortization and the original mortgage term equals five years.

a. What is the monthly payment over the term of the mortgage?

b. What will the outstanding principal balance be at the end of the mortgage term of five years?

c. What will the monthly payments be if, at the end of five years, the loan is renewed at 7.5% APR compounded semi-annually (the remaining amortization period is ten years)?