University of Lethbridge
Assignment 2
Finance 3040: Finance
Holly Dalton
Furo Dublin - Green
Madelyne Heller
Emmanuel Marfo
Hubert YI
supervised by
Dr. Konard Sobanski
July 18, 2024
Question 1: Amortized Loan with Fixed Total Payment
(Annuity Loan)
Prepare an amortization schedule for a five - year loan of $42, 000.
The interest rate is 8% per year, and loan calls for equal annual payments.
How much total interest is paid over the life of the loan?
Solution:
Something is known:
C = annual payment
r = annual interest rate (8% or 0.08)
PV = present value (loan amount, $42, 000)
t = number of periods (5 years)
1
1−
(1+r)t
PV of Annuity = C ×
r
1
1−
(1+r)t
PV of Annuity = C ×
r
1
1−
(1+0.08)5
$42, 000 = C ×
0.08
1
$42, 000 × 0.08 = C × 1 −
(1 + 0.08)5
$3, 360 1
=1−
C (1 + 0.08)5
$3, 360
≈ 0.3194
C
$3, 360
C= ≈ $10, 519.72
0.3194
2
Total Payment = Interest + Principal
Interest = 8% × Beginning Balance
Principal = Total Payment − Interest
Ending Balance = Beginning Balance − Principal
Repayment Schedule Table:
Year Beginning Balance Total Payment Interest 8% Principal Ending Balance
1 42, 000 10, 519.72 3, 360 7, 159.72 34, 840.28
2 34, 840.28 10, 519.72 2, 787.22 7, 732.50 27, 107.78
3 27, 107.78 10, 519.72 2, 168.62 8, 351.10 18, 820.70
4 18, 756.68 10, 519.72 1, 500.53 9, 019.19 9, 737.49
5 9, 737.49 10, 519.72 779.00 9, 740.72 0.00
Total 52, 598.62 10, 595.37 42, 003.23
∴ the total interest = $3, 360 + $2, 787.22 + $2, 168.62 + $1, 500.53 + $779 = $10, 595.37
Question 2: Amortized Loan with Fixed Principal
Payment
Rework Question 1 assuming that the loan agreement calls for a principal
reduction of $8, 400 every year instead of equal annual payments.
Solution:
Total Payment = Interest + Principal
Interest = 8% × Beginning Balance
Principal = Total Payment − Interest
Ending Balance = Beginning Balance − Principal
Principal (fixed) = $8, 400
3
Repayment Schedule Table:
Year Beginning Balance Principal(fixed) Interest Total payment Ending Balance
1 42, 000 8, 400 3, 360 11, 760 33, 600
2 33, 600 8, 400 2, 688 11, 088 25, 200
3 25, 200 8, 400 2, 016 10, 416 16, 800
4 16, 800 8, 400 1, 344 9, 744 8, 400
5 8, 400 8, 400 672 9, 072 0
Total 42, 000 10, 080 52, 080
∴ the total interest = $3, 360 + $2, 688 + $2, 016 + $1, 344 + $672 = $10, 080
Question 3:
You are planning to make monthly deposits of $300 into a retirement account
that pays 1% interest on a monthly basis.
If your first deposit will be made one month from now, how large will your
retirement account be in 30 years?
Solution:
Something is known:
C = monthly deposit = $300
r = monthly interest rate (1% or 0.01)
t = number of periods (30 years) = 360 months
(1 + r)t − 1
FV = C ×
r
4
(1 + r)t − 1
FV = C ×
r
(1 + 0.01)360 − 1
= $300 ×
0.01
35.9496 − 1
= $300 ×
0.01
= $300 × 3, 494.964
= $1, 048, 489.24
∴ FV will be $1, 048, 489.24.
Question 4:
Royal Bank charges 14.2% compounded monthly on its business loans.
First United Bank charges 14.5% compounded semi-annually.
As a potential borrower, which bank would you go to for a new loan?
Solution:
(1) : Royal Bank:
APR = 14.2%
m = 12 m
APR
EAR = 1 + −1
m
m
APR
EAR = 1 + −1
m
12
0.142
= 1+ −1
12
= 1.1512 − 1 = 0.1512 = 15.12% per annum
5
(2) : United Bank:
APR = 14.5%
m=2 m
APR
EAR = 1 + −1
m
m
APR
EAR = 1 + −1
m
2
0.145
= 1+ −1
2
= 1.1503 − 1 = 0.1503 = 15.03% per annum
∴ choose Royal Bank, since 15.12% > 15.03%.
Question 5:
You have just won the lottery and will receive $1, 000, 000 every year.
You will receive payments for 30 years, which will increase 5% per year.
If the appropriate discount rate is 9%, what is the present value of your
winnings?
Solution:
T
C 1+g
PV = 1−
r−g 1+r
6
C = $1, 000, 000
r(discount rate) = 9% (0.09)
g = 5% (0.05)
30
$1, 000, 000 1 + 0.05
= 1−
0.09 − 0.05 1 + 0.09
30
1.05
= $25, 000, 000 1 −
1.09
= $25, 000, 000(1 − 0.3257)
= $16, 857, 500
∴ the present value of your winnings will be $16, 857, 500.
