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Seminar 5

maths for finance upf barcelona

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13 views

Seminar 5

maths for finance upf barcelona

Uploaded by

galvarezllado
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Seminar 5 - Financial Mathematics

These are the practice problems that will be treated in the 5th seminar class.

You do NOT have to hand in solutions, but should be prepared to solve these

exercises during class. Solutions to these exercises will not be uploaded, so

please make sure you take notes in class.

Practice Problem 5.1

Consider a loan of A dollars to be repaid with equal payments of R dollars at the end of

each period for n periods, at rate i per period. Show that in the sum of interest payments

up to the k-th period (1 ≤ k ≤ n) is equal to:

Pk
x=1 Ix = kR − [A − Bk ]

Practice Problem 5.2

The Smiths buy a home and take out a 160,000$ mortgage on which the interest rate is

allowed to float freely. At the time the mortgage is issued, interest rates are j12 = 6%

and the Smiths choose a 25 year amortization schedule with equal monthly payments. Six

months into the mortgage interest rises to j12 = 8%. Three years into the mortgage (after

36 payments) interest rate drops to j12 = 7% and 4 years into the mortgage to j12 = 5.5%.

Determine the outstanding balance of the mortgage after 5 years.

Practice Problem 5.3

A debt is amortized at j4 = 10% by payments of 300$ per quarter. If the outstanding prin-

cipal is 2,853.17$ just after the k-th payment, what was it just after the (k −1)st payment?

Practice Problem 5.4

Big Corp built a new factory in 2003 at a cost of 1.7M$. It paid 200,000$ in cash and

assumed a mortgage for 1.5M$ to be repaid over 10 years by equal semi-annual payments

due each June 30 and December 31, the first payment being due on December 31, 2003.

The mortgage interest rate is 5.5% per annum compounded semi-annually and the original

date of the loan was July 1, 2003. a) What will be the total of the payments made in 2005

1
on this mortgage? b) Mortgage interest paid in any year is an income tax deduction for

that year. What is the size of that deduction for Big Corp in 2005?

Practice Problem 5.5

Suppose the factory described in 5.4 is sold on January 1, 2007. The buyer pays 700,000$

in cash to Big Corp and takes over the outstanding mortgage. What is Big Corp’s capital

gain in $ terms (amount realized - buyers equity).

Practice Problem 5.6

To pay off the purchase of a car, Chantal got a 15,000$, 3-year loan at an interest rate

equivalent to an annual discount rate of 11.5%. She makes monthly payments. How much

does she still owe on the loan at the end of two years (after 24 payments)? Use both the

retrospective and prospective method.

Practice Problem 5.7

A company decides to borrow 100,000$ at j1 = 12% in order to finance a new equipment

purchase using an American Loan. They must make annual payments into a sinking fund,

which is used to pay off the loan at the end of 20 years. The sinking fund investment earns

j1 = 6%. What overall effective annual compound interest rate is the company paying to

borrow the 100,000$ when taking the sinking-fund requirement into account?

Practice Problem 5.8

A loan of 15,000$ is taken out. Interest payments are due every three months. A sinking

fund is set up to repay the 15,000$ in one lump sum at the end of 6 years. The sinking

fund earns j4 = 4% and deposits are made quarterly. The quarterly payments are 867.35$

(=interest payments on the loan & sinking fund payments). Calculate a) the interest rate

on the loan; b) the book value of the debt (=outstanding balance - accumulated capital

in the fund) after 2 years.

2
Practice Problem 5.9

A loan of 100,000$ at j1 = 8% has to be repaid by making annual payments over 10

years: 20,000$ by the amortization method and 80,000$ by the sinking fund method,

where the sinking fund accumulates at rate j4 = 5%. What extra annual payment does

this arrangement require above repayment of the whole loan through the amortization

method?

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