Principles of Finance

Assignment: Assignment 3: Interest Rates (class 5)

Please answer all questions.

1. Your bank is offering you an account that will pay 20% interest in total for a two-year deposit. Determine the equivalent discount rate for a period length of:

a. Six months.

b. One year.

c. One month.

2. Your best taxable investment opportunity has an EAR of 4%. You best tax-free investment opportunity has an EAR of 3%. If your tax rate is 30%, which opportunity provides the higher after-tax interest rate?

3. You have just purchased a home and taken out a $500,000 mortgage. The mortgage has a 30-year term with monthly payments and an APR of 6%.

a. How much will you pay in interest, and how much will you pay in principal, during the first year?

b. How much will you pay in interest, and how much will you pay in principal, during the 20th year (i.e., between 19 and 20 years from now)?

 
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