## Info

\$25,000 45.000 65.000

end of each month. If the interest rate you choose is a 9 percent EAR, what is the size of the settlement? If you were the plaintiff, would you like to see a higher or lower interest rate?

59. Calculating EAR with Points. You are looking at a one-year loan of \$10,000. The interest rate is quoted as 9 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay three points to the lender up front and repay the loan later with 9 percent interest. What rate would you actually be paying here?

60. Future Value and Multiple Cash Flows. An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company:

First birthday: \$ 800

Second birthday: \$ 800

Third birthday: \$ 900

Fourth birthday: \$ 900

Fifth birthday: \$1,000

Sixth birthday: \$1,000

After the child's sixth birthday, no more payments are made. When the child reaches age 65, he or she receives \$350,000. If the relevant interest rate is 11 percent for the first six years and 7 percent for all subsequent years, is the policy worth buying?

5.1 Annuity Future Value. The St. Louis Federal Reserve Board has files listing historical interest rales on their Web site www.stls.frb.org. Find the link for "FRED'"" (Federal Reserve Economic Data). You will find listings for Moody's Seasoned Aaa Corporate Bond Yield and Moody's Seasoned Baa Corporate Bond Yield. (These rates are discussed in the next chapter.) If you invest \$2,000 per year for the next 40 years at the most recent Aaa yield, how much will you have? What if you invest the same amount at the Baa yield?

5.2 Loan Payments. Finding the time necessary until you pay off a loan is simple if you make equal payments each month. However, when paying off credit cards many individuals only make the minimum monthly payment, which is generally \$10 or 2 percent to 3 percent of the balance, whichever is greater. You can find a credit card calculator at www.fincalc.com. You currently owe \$10,000 on a credit card with a 17 percent interest rate and a minimum payment of \$10 or 2 percent of your balance, whichever is greater. How soon will you pay off this debt if you make the minimum payment each month? How much total interest will you pay?

5.3 Annuity Payments. Find the retirement calculator at www.moneychimp.com to answer the following question: Suppose you have \$1,500,000 when you retire and want to withdraw an equal amount each year for the next 30 years. How much can you withdraw each year if you earn 7 percent? What if you can earn

9 percent?

Annuity Payments. The St. Louis Federal Reserve Board has files listing historical interest rates on their Web site www.stls.fVb.org. Find the link for "FREDM" (Federal Reserve Economic Data). You will find a listing for the Bank Prime Loan Rate. The file lists the monthly prime rates since January 1949 (1949.01). What is the most recent prime rate? What is the highest prime rate over this period? If you buy a house for \$150,000 at the current prime rate on a 30-year mortgage with monthly payments, how much are your payments? If you had purchased the house at the same price when the prime rate was at its highest, what would your monthly payments have been?

Loan Amortization. Bankrate.com, located at www.bankrate.com, has a financial calculator that will prepare an amortization table based on your inputs. First, find the APR quoted on the Web site for a 30-year fixed rale mortgage. You want to buy a home for \$200,000 on a 30-year mortgage with monthly payments at the rate quoted on the site. What percentage of your first month's payment is principal? What percentage of your last month's payment is principal? What is the total interest paid on the loan?