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Chapter 5 Interest Rate Essay

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Chapter 5 Interest Rates

Problem 3
Which do you prefer: a bank account that pays 5% per year (EAR) for three years or
a. An account that pays 2 every six months for three years?
b. An account that pays 7 every 18 months for three years?
c. An account that pays per month for three years?

If you deposit $1 into a bank account that pays 5% per year for 3 years you will have after 3 years.
a. If the account pays per 6 months then you will have after 3 years, so you prefer every 6 months.
b. If the account pays per 18 months then you will have after 3 years, so you prefer 5% per year.
c. If the account pays per month then you will have after 3 years, so you prefer every month.

Problem 6 Your bank account pays …show more content…

For the second month, solve for the value of the remaining 58 payments:

49,283.36 - 48,563.14 = 720.22 is amount of the payment that went to paying the principal, while 966.64 – 720.22 = 246.42 was interest.

For the first year, solve for the value of the remaining 48 payments:

50,000 - 41,159.84 = 8840.16 is amount of the payment that went to paying the principal, while (966.64 12) - 8840.416 = 2759.52 was interest.

b. At the end of year 3, there are 24 payments remaining. The balance of the loan is:

At the end of year 4, there are only 12 payments remaining. The balance of the loan at the end of the 4th year is:

21,810.17 - 11,231.33 = 10,578.84 is amount of the payment that went to paying the principal, while (966.64 12) - 10,578.84 = 1,020.84 was interest.

Problem 23 The mortgage on your house is five years old. It required monthly payments of $1402, had an original term of 30 years, and had an interest rate of 10% (APR). In the intervening five years, interest rates have fallen and so you have decided to refinance—that is, you will roll over the outstanding balance into a new mortgage. The new mortgage has a 30-year term, requires monthly payments, and has an interest rate of 6 5⁄8% (APR).
a. What monthly repayments will be required with the new loan?
b. If you still want to pay off the mortgage in 25 years, what monthly payment should you make

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