This topic contains a solution. Click here to go to the answer

Author Question: You pay 10 down on a home with a purchase price of 280,000. Your bank will loan the remaining ... (Read 63 times)

rosent76

  • Hero Member
  • *****
  • Posts: 516
You pay 10 down on a home with a purchase price of 280,000. Your bank will loan the remaining balance of 252,000 at 8.23 APR. You have an option to make annual payments or monthly payments on the loan.
 
  Both options have a 30-year payment schedule. What are the annuity payments under the annual plan? What are the annuity payments under the monthly plan? In terms of the total cash outflows and the effective cost of borrowing, briefly compare both plans.
  What will be an ideal response?

Question 2

You are offered a perpetuity that will pay you 18,000 per year starting in one year. The seller wants you to pay 300,000 for the perpetuity. If you buy it at that price, what return will you earn?
 
  A) 6
  B) 5
  C) 7
  D) 8
  E) 9



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by a Subject Expert

Danny Ewald

  • Sr. Member
  • ****
  • Posts: 332
Answer to Question 1

Answer: You will borrow (1 - 0.1)  280,000 = 252,000 and this is the PV. For the annual plan, the PVIFA using r = 8.23 and n = 30 periods is 11.01782.
The annual annuity payment is: PMT = = = 22,872.03.
The PVIFA using = 0.68583 and n = 30  12 = 360 periods is 133.35804. The monthly annuity payment is: PMT = = = 1,889.65.
Multiplying this payment by 12 gives 22,675.80. This total for 12 months (or one year) is less than the annual payment of 22,872.03. Thus, by increasing the number of payments per year, you reduce your total cash outflows. Using the EAR formula, we get an effective cost of 8.55 for the monthly plan. Since the effective cost is the same as the 8.23 APR, the effective cost under the annual plan is 8.23. Thus, under the monthly plan you decrease you cash outflows but increase your effective cost of borrowing.

Answer to Question 2

A




rosent76

  • Member
  • Posts: 516
Reply 2 on: Jul 10, 2018
YES! Correct, THANKS for helping me on my review


mcarey591

  • Member
  • Posts: 365
Reply 3 on: Yesterday
:D TYSM

 

Did you know?

Limit intake of red meat and dairy products made with whole milk. Choose skim milk, low-fat or fat-free dairy products. Limit fried food. Use healthy oils when cooking.

Did you know?

Between 1999 and 2012, American adults with high total cholesterol decreased from 18.3% to 12.9%

Did you know?

Your heart beats over 36 million times a year.

Did you know?

Dogs have been used in studies to detect various cancers in human subjects. They have been trained to sniff breath samples from humans that were collected by having them breathe into special tubes. These people included 55 lung cancer patients, 31 breast cancer patients, and 83 cancer-free patients. The dogs detected 54 of the 55 lung cancer patients as having cancer, detected 28 of the 31 breast cancer patients, and gave only three false-positive results (detecting cancer in people who didn't have it).

Did you know?

On average, someone in the United States has a stroke about every 40 seconds. This is about 795,000 people per year.

For a complete list of videos, visit our video library