Question

26. When he was 30 years old, about the time he took over the restaurant from his father, Mr. Moore bought an unusual insurance policy: it was in the form of a “zero coupon” bond. The bond paid 5% per year and guaranteed him $475,000 when it matured in 50 years. He paid a single premium amount and no further payments were necessary. What did Mr. Moore pay for the policy when he bought it? Hint: This is a problem in PV (present value).

27. Mr. More wants to get into the catering business, specifically by using his family's secret sauce recipe which can be used on any meat product (i.e. hamburgers, hotdogs, chicken, etc.). To transport food, he bought a small SUV as a delivery truck for $75,000. He financed it for 2 years at 12% and will make equal payments each month for the 6 years. What will the monthly payments be?

28. About the SUV that Mr. Moore was thinking of buying for $75,000.00 and financing at 12% for 2 years: When the vehicle is paid off, how much will have been paid for the truck?

29. When shopping to buy the SUV for a delivery truck, a competing dealer offered him two options to finance the purchase price of $65,000 for the same truck: Cash Back Option - $10000 “Cash Back” and the balance paid in yearly installments at 5% (compound interest) per year for 5 years (to be applied as a downpayment to reduce the price) Full Price Option - full price ($65,000) paid at no interest over 5 years. Under which option will the truck cost the LEAST? Hint: Don't forget to take “cash back” into account.

1) Can’t tell. Need more information about alternative investment and finance rates.

2) The “Cash Back” option

3) The “Full Price” option

4) Either option. They both produce the same result.

Answer 1

26]

Present value = future value / (1 + interest rate)^{number of years}

Present value = $475,000 / (1 + 5%)⁵⁰

Present value = $41,421.77

The amount paid to buy the policy is $41,421.77