Quiz 1 - Solutions 2 marks 1.

a What is the per period rate on a loan that charges interest at 8% APR compounded monthly? a) b) c) d) e) f) 8.0% 4.0% 2.0% 0.6666% 0.153846% 0.021918%

1.b What is the per period rate on a loan that charges interest at 8% APR compounded quarterly? a) b) c) d) e) f) 8.0% 4.0% 2.0% 0.6666% 0.153846% 0.021918%

1.c What is the per period rate on a loan that charges interest at 8% APR compounded daily? a) b) c) d) e) f) 8.0% 4.0% 2.0% 0.6666% 0.153846% 0.021918%

1.d What is the per period rate on a loan that charges interest at 8% APR compounded weekly? a) b) c) d) e) f) 8.0% 4.0% 2.0% 0.6666% 0.153846% 0.021918%

2 marks 2.a 8% APR compounded quarterly equals _____ EAR? a) b) c) d) e) f) 8.000% 8.160% 8.243% 8.300% 8.322% 8.328%

2.b 8% APR compounded weekly equals _____ EAR? a) b) c) d) e) f) 8.000% 8.160% 8.243% 8.300% 8.322% 8.328%

2.c

8% APR compounded monthly equals _____ EAR? a) b) c) d) e) f) 8.000% 8.160% 8.243% 8.300% 8.322% 8.328%

2.d 8% APR compounded semi-annually equals _____ EAR? a) b) c) d) e) f) 8.000% 8.160% 8.243% 8.300% 8.322% 8.328%

3.a (5 marks) Gunther currently has $31,000 in his RRSP. He plans to contribute $5,000 to his RRSP every six months for the next 17 years. How much money will he accumulate in his RRSP if his savings earns 4.00% APR compounded semiannually? Show your work or calculator key strokes (zero marks for the correct answer only). PV = 31,000 I% = 2 = 4/2 PMT = 5000 n = 34 = 17 x 2 FV => $300,949.96 via formula: 1 1 1 1 FV = 31,000*(1+0.02)34+(5000/0.02)*[(1 + 0.02)341] FV = 60,780.96 + 240,169.00 =$300,949.96 1-mark 1-mark 1-mark 1-mark 1-mark

=4-marks 1 mark (correct answer)

3.b Gertrude currently has $30,000 in her RRSP. He plans to contribute $500 to her RRSP every month for the next 16 years. How much money will she accumulate in her RRSP if his savings earns 4.00% APR compounded monthly? Show your work or calculator key strokes (zero marks for the correct answer only). PV = 30,000 I% = .333333 = 4/12 PMT = 500 n = 192 = 16 x 12 FV => $191,003.43 via formula: FV = 30,000*(1+0.00333333)192+(500/0.00333333)*[(1 + 0.00333333)1921] FV = 56,833.91 + 134,169.53 =$191,003.43

3.c George currently has $3,000 in his RRSP. He plans to contribute $550 to his RRSP every three months for the next 18 years. How much money will she accumulate in her RRSP if his savings earns 4.00% APR compounded quarterly? Show your work or calculator key strokes (zero marks for the correct answer only). PV = 3,000 I% = 1.0 = 4/4 PMT = 550 n = 72 = 18 x 4 FV => $63,731.76 via formula: FV = 3,000*(1+0.01)72+(550/0.01)*[(1 + 0.01)721] FV = 6,141.30 + 57,590.46 =$63,731.76 3.d Guy currently has $300,000 in his RRSP. He plans to contribute $5,000 to his RRSP every six months for the next 7 years. How much money will he accumulate in his RRSP if his savings earns 4.00% APR compounded semi-annually? Show your work or calculator key strokes (zero marks for the correct answer only). PV = 300,000 I% = 2.0 = 4/2 PMT = 5000 n = 14 = 7 x 2 FV => $475,713.32 via formula: FV = 300,000*(1+0.02)14+(5000/0.02)*[(1 + 0.02)141] FV = 395,843.63 + 79,869.69 =$475,713.32

4.a (5 marks) Fred & Ethel had to take out a mortgage totalling $200,000 to finance the purchase of their very first home. Their mortgage loan is based on a 20-year amortization period and they are required to make mortgage payments on a monthly basis. The interest rate on their mortgage loan is 6% APR compounded monthly. How much is their monthly mortgage payments? PV = -200,000 I% = 0.5 = 6/12 n = 240 = 20 x 12 FV = 0 PMT => 1,432.86 via formula: 1 1 1 1 240 $200,000 = (PMT/0.005)[11/(1.005) ] PMT= ($200,000*.005)/.697904 = $1,432.86 1-mark 1-mark 1-mark 1-mark 1-mark

= 4-marks 1-mark (correct answer)

4.b Fred & Ethel had to take out a mortgage totalling $100,000 to finance the purchase of their very first home. Their mortgage loan is based on a 25-year amortization period and they are required to make mortgage payments on a monthly basis. The interest rate on their mortgage loan is 6% APR compounded monthly. How much is their monthly mortgage payments? PV = -100,000 I% = 0.5 = 6/12 n = 300 = 25 x 12 FV = 0 PMT = 644.30 via formula: $100,000 = (PMT/0.005)[11/(1.005)300] PMT= ($100,000*.005)/.776034 = $644.30

4.c Fred & Ethel had to take out a mortgage totalling $250,000 to finance the purchase of their very first home. Their mortgage loan is based on a 25-year amortization period and they are required to make mortgage payments on a monthly basis. The interest rate on their mortgage loan is 4% APR compounded monthly. How much is their monthly mortgage payments? PV = -250,000 I% = 0.333333 = 4/12 n = 300 = 25 x 12 FV = 0 PMT = 1,319.59 via formula: $250,000 = (PMT/0.00333333)[11/(1.00333333)300] PMT= ($250,000*.00333333)/.631508 = $1,319.59 4.d Fred & Ethel had to take out a mortgage totalling $100,000 to finance the purchase of their very first home. Their mortgage loan is based on a 15-year amortization period and they are required to make mortgage payments on a monthly basis. The interest rate on their mortgage loan is 4% APR compounded monthly. How much is their monthly mortgage payments? PV = -100,000 I% = 0.333333 = 4/12 n = 180 = 15 x 12 FV = 0 PMT = 739.69 via formula: $100,000 = (PMT/0.00333333)[11/(1.00333333)180] PMT= ($100,000*.00333333)/.45064 = $739.69