Question

You are the beneficiary of a trust set up by your grandparents. You will receive your first $2,000 cash ten years from now (T=10) when you turn age 30. To cover the cost of inflation, these cash flows will grow at 3.0% per year in perpetuity. Assume the appropriate discount rate is 5.0% per annum. What is the present value of this perpetuity today (T=0)? 6. a. $29,764 b. $30,657 c. $72,242 d. $74,409 e. $76,642 Today is January 1", 2020 (T=0). You take out a 30 year fully amortizing mortgage of $400,000. Payments are made at the end of each calendar month. The loan has a fixed annual rate of 4.0% (or 4.0%/12 per month). How payments will you have to make until you have at least $300,000 of equity in your home? 7. a. 32 b. 33 109 d. 110 e. 111 C.

Answer 1

Question 6:

Option d is correct

First Cash amount = $ 2000

Growth Rate = 3%

Discount Rate = %

Value of perpetuity 10 years from now = ($2000)/(0.05-0.03)

= $ 100,000

Present Value of Perpetuity = $ 100,000 * Growth Rate Discounting factor for 10 years

= $ 100,000 * 0.74409

= $ 74,409

Question 7:

EMI for Mortgage Loan is $ 1909.66

where

(1+r)" - 1

• A = payment Amount per period
• P = initial Principal (loan amount)
• r = interest rate per period
• n = total number of payments or periods

How many payments to be made to ensure $300000 equity in home is 303 installment ( in 26th year)

Repayment schedule in 26th year

year 25 end
301	$103,692.82	$345.64	$1,564.02	$102,128.81
302	$102,128.81	$340.43	$1,569.23	$100,559.57
303	$100,559.57	$335.20	$1,574.46	$98,985.11
304	$98,985.11	$329.95	$1,579.71	$97,405.40
305	$97,405.40	$324.68	$1,584.98	$95,820.42
306	$95,820.42	$319.40	$1,590.26	$94,230.16
307	$94,230.16	$314.10	$1,595.56	$92,634.60
308	$92,634.60	$308.78	$1,600.88	$91,033.72
309	$91,033.72	$303.45	$1,606.21	$89,427.51
310	$89,427.51	$298.09	$1,611.57	$87,815.94
311	$87,815.94	$292.72	$1,616.94	$86,199.00