Investing/Budgeting Review Questions

1. You would like to have $5000 in savings at the end of five years. How much money, in equal amounts, must be invested at the end of each of the next five years in order to achieve your goal? Your current savings balance is $500 and the interest rate you expect to earn over the next five years is 6.5 percent per year.

2. Calculate the following:
a. The monthly payments required on a $2000 loan bearing a 15 percent per year interest rate (1 ¼ percent per month). The loan is to be paid back in eighteen equal monthly installments.
b. The total amount of interest paid over eighteen months for the loan in (a).
c. The monthly payments on a thirty-year mortgage for $25,000. The interest rate is 9 percent per year (3/4 percent per month).
d. The total amount of interest paid over thirty-years for the loan in (c).

3. You own an apartment house that provides a net income to you of $2000 per month. What is the maximum twenty-year mortgage loan you could obtain such that the payments on the loan could be made entirely from the apartment income? Assume a 9 percent annual interest rate (¾ percent per month) and monthly payments on the mortgage.

4. Your grandfather left you $40,000 when he died. You can invest the money to earn 9 percent per year.
a. If you spend $7227 per year out of this inheritance, how long will the money last.
b. If you spend $3600 per year, how long will the money last?
c. What is the most you can spend in equal annual amounts from the inheritance for the next 20 years?

5. Your work for a company that provides a pension plan for which the company contributes 50 percent of the amount you contribute. For example, if you specify that $100 of your monthly salary is to go into the plan, the company will add $50 to make the total contribution $150 per month. The plan guarantees an annual interest rate of 8 percent (compounded monthly). If you believe you can safely earn 12 percent per year (compounded monthly) by investing the money yourself, is it worthwhile belonging to the company plan? Assume that you plan to retire in thirty-years and that you will set aside $80 per month regardless of the approach used.

6. You are the parent of a four-year old girl and plan to begin saving next year on her fifth birthday (on September 2, 1992) for her college education. You wish to provide $15,000 per year for four years beginning when she is eighteen. How much money in thirteen equal annual installments must be invested each year until she is seventeen (on September 2, 2004) to meet this goal if you earn 9 percent on your investment?

7. Sandy Triton is an avid scuba diver. Sandy has decided to purchase a dry suit for diving. Sandy must decide which one of two suits to buy. First, a "Norway" suit for $750 or an "Oregon" suit for $300. The major difference between the two is that the Norway should last for 300 dives whereas the Oregon suit will need to be replaced after 100 dives. Sandy has $750 in a savings account paying 8 percent interest, which can be used to pay for either suit. Which suit would be most economical for Sandy to buy? Analyze Sandy's problem for each of the following assumptions:

a. Sandy expects to make 25 cold water dives per year for the next 12 years.
b. Sandy expects to make 50 cold water dives per year for the next 6 years.

8. Ole Hanson wants to save money to meet two objectives. First he would like to be able to retire twenty years from now and have a retirement income of $30,000 per year for at least thirty years. Second he would like to purchase a fishing boat five years from now at an estimated cost of $20,000. He can afford to save only $6,000 per year for the first ten years. Ole expects to earn 8 percent per year on average from investments over the next fifty years. What must his minimum annual savings be from years 11 through 20 to meet his objectives?

9. One year ago you borrowed $10,000 at an annual interest rate of 12 percent (1 percent per month) to be repaid in thirty-six (36) monthly installments of $332.14 each. You have made twelve (12) payments on the loan.

a. What is the current balance remaining on the loan? (Hint: What is the relationship between the present value of the remaining payments to be made on the loan and its current balance?)
b. What will be the balance owed on the loan one year from now if all payments are made as scheduled?
c. What is the dollar amount of interest to be paid on the loan in the coming year? (Hint: The answers to (a) and (b) are very useful in answering (c).)