# Fin 534 Essay

1. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

C. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. If the interest rate is low on a loan, the amount of repayment is low. 2. Which of the following statements is CORRECT?

C. to solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. I must say finding the PV (present

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A. $3,726

8 I (interest earned)

46 n (periods remaining)

-2500 pmt (payment made into the account each period)

0 PV (starting balance of account) solve for FV

FV = $1,129,750.38

8 I

41 n (only 41 more payments here)

0 PV (starting balance)

1,129,750.38 FV (ending value) solve for pmt pmt = 3,725.55

5. John and Daphne are saving for their daughter Ellen's college education. Ellen just turned 10 at (t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 years--if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11).

So far, John and Daphne have accumulated $15,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional $5,000 in each of the next 4