Question

SHOW ALL WORK. Preferred if you showed how to do it on both financial calculator and by hand.

1.  You purchase a residential building lot in Cleveland for $39,650, put $7,000 down, and finance the balance for 15 years at 12% APR, compounded quarterly. What is your quarterly mortgage payment?

A. $979.5

B. $1,179.74

C. $1,432.67

D. $3,918

2. A factory costs $400,000. It will produce an inflow after operating costs of $100,000 by the end of year 1, $200,000 by the end of year 2, and $300,000 by the end of year 3. The opportunity cost of capital is 12%. Should you build this factory?

A. Yes

B. No

C. Indifferent

D. Not enough information

3. Derive the formula for pricing a perpetuity: P = C / r

4. Derive the formula for pricing a coupon bond that pays a coupon at the end of each period. What will the formula be if the coupons are paid at the beginning of each period (i.e. you receive a coupon immediately after you acquired the bond and only receive the face value when it matures).

Answer 1