[sek2392]

1. Suppose that you need to borrow $2000 from your local bank, which offers a discount rate of 7 ¾ % if you pay off your loan in 2 years.

a. How much would you expect to receive as a proceeds?






b. What should be the loan amount if you need to get the entire $2000?







c. What if you want to get $2000 but you want to limit your loan to $2200 and pay it off in 3 years? Assume that the bank would agree but only if they change the discount rate. What would be the new discount rate?








d. What would be the benefit to the bank if the agree with the change in c above?






e. What would be the term of discount if the bank offers 3.87% discount rate? And how much would the bank get? Keep the loan and proceeds as they were in 3-b above











2. a. Find the interest rate (r) which is comparable to the discount rate (d) of 7 ¾ % in question #1 above.





b. What would be the discount rate (d) that is comparable to the interest rate (r) of 10%.





3. When he turned 42, Jim started to contribute to his retirement account by making a deposit of $2500, which is matched by his employer one and a half for one at the end of each year. His IRA account bears 9 ½ % interest compounded semiannually

a. How much will he have available for him when he retires at 65?














b. If Jim wishes to have a total of $600,000 in his IRA when he retires, How much should his (and his employer's) contribution be? Consider the same (r) and (n) of question# 3-a.










c. Consider question #3-a and suppose that Jim's contribution is $2000 but matched by his employer as double. Also suppose that Jim's goal is to accumulate half a million dollar in his IRA. At what age should his retirement be to achieve that goal, given that his account bears 10% interest compounded semiannually?









4. For the following 4-a through 4-c, recalculate what you did in 3-a through 3c assuming the IRA contributions are deposited at the beginning of each term, instead of the end of terms.

a.








b.





c.