106. A loan officer states, “Thousands of dollars can be saved by switching to a 15-year
mortgage from a 30-year mortgage.” Calculate the difference in payments on a 30-year mortgage
at 9% interest versus a 15-year mortgage with 8.5% interest. Both mortgages are for $100,000
and have monthly payments. What is the difference in total dollars that will be paid to the lender
under each loan? (Round the monthly payment amounts to 2 decimal places.)
107. Would you prefer a savings account that paid 7% interest compounded quarterly, 6.8%
compounded monthly, 7.2% compounded weekly, or an account that paid 7.5% with annual
compounding?
108. After reading the fine print in your credit card agreement, you find that the “low” interest
rate is actually an 18% APR, or 1.5% per month. What is the effective annual rate?
109. You are considering the purchase of a home that would require a mortgage of $150,000.
How much more in total interest will you pay if you select a 30-year mortgage at 5.65% rather
than a 15-year mortgage at 4.9%? (Round the monthly payment amount to 2 decimal places.)
110. Lester’s just signed a contract that will provide the firm with annual cash inflows of
$28,000, $35,000, and $42,000 over the next three years with the first payment of $28,000
occurring one year from today. What is this contract worth today at a discount rate of 7.25%?
111. Miller’s Hardware plans on saving $42,000, $54,000, and $58,000 at the end of each year
for the next three years, respectively. How much will the firm have saved at the end of the three
years if it can earn 4.5% on its savings?
112. What is the difference between real and nominal cash flows and between real and
nominal interest rates?
113. How should we compare interest rates quoted over different time intervals—for example,
monthly versus annual rates?
114. Discuss the statement, “Money has a time value.”
115. Show numerically that a savings account with a current balance of $1,000 that earns
interest at 9% annually is precisely sufficient to make the payments on a 3-year loan of $1,000
that carries equal annual payments at 9% interest.
116. Discuss the statement, “It is always preferred to select an account that offers compound
interest over an account that offers simple interest.”
117. Why is it difficult and perhaps risky to evaluate financial projects based on APR alone?
118. What problem can be caused by “mixing” real and nominal cash flows in discounting
exercises?
119. Some home loans involve “points,” which are fees charged by the lender. Each point
charged means that the borrower must pay 1% of the loan amount as a fee. For example, if 0.5
point is charged on a $100,000 loan, the loan repayment schedule is calculated on the $100,000
loan, but the net amount the borrower receives is only $99,500. What is the effective annual
interest rate charged on such a loan, assuming that loan repayment occurs over 360 months, and
that the interest rate is 1% per month? (Round the monthly payment amount to 2 decimal
places.)