NB: Engineering Economics not Finance Cash flow diagrams and formulars are different.

1. A series of twenty $1000 semi-annual payments are received at the end of each semi-annual period. During the first two years the interest rate is 4% annual compounded monthly. During the following two years (years 3-4) the interest rate is 5% annual compounded semiannually. During the last six years (years 5-10) the interest rate is 7% compounded annually. Show the cash flow and find the future equivalent of this series of payments.

2. You are taking out a loan for $50,000. The term of the loan is 10 years, you will make monthly payments, and the interest rate is 4% annual compounded monthly. Find the monthly payment, the future value, and the annual effective rate.

3. GM is selling a 10 year bond that pays 5% of the par value annually for $2,149. You will receive 7% compounded annual interest if you purchase this bond. What is the par value?

4. I'm looking forward to retiring and recently the Social Security Administration sent me some information on my options. If I retire at age 62, I will receive $1,792 per month for life starting the month after I turn 62. If I wait until my full retirement age of 66 years and 4 months, I will receive $2,490 per month for life starting the month after I turn 66 and 4 months.

a) I think that I can get an investment that pays 3% annual compounded monthly. How old will I be when the two above options are equal?

5. To purchase a house, a couple borrows $280,000 at 4.1% annual interest compounded monthly. The loan was to be paid off in equal monthly payments over 15 years. At the 8-year loan anniversary date they paid off the loan.

a) What was the monthly payment amount?

b) Including the monthly payment due at the 8-year loan anniversary date, how much was needed to pay off the loan?

c) How much total interest had the couple paid when the loan was paid off at the 8-year loan anniversary date?

d) If they had made all of the payments for 15 years, what is the total interest the couple would have paid on the loan?

6. You find yourself short on cash so you go to a payday loan company to help you until payday. They will loan you $100 today and in two weeks you will pay them $130. What are the weekly compounded interest rate and the annual nominal rate for this loan?

7. You are in charge of making yearly purchases for your company covering a variety of items. Historically, these costs have increased 6% per year and you anticipate that this will continue. This year the expenses will be $21,500. Your supervisor wants to create a fund that will cover the expenses for the next 5 years. How much will you need to put in this fund if the corporate interest rate is 8% compounded annually?

8. An SMU alumnus wants to create a scholarship that pays for the spring summer and fall semesters. The fund will pay $6000 at the end of January, $5000 at the end of May, and $6000 at the end of August every year. If the interest rate available is 4% annual compounded monthly, how much will need to be deposited for this to continue in perpetuity?

9. For the business that is being analyzed, it is determined that using a continuous flow of funds works best. The monthly continuous flow of funds is $5000 and is stable throughout the years. How much will you have after two years if

1. The interest rate is 5% compounded annually?

2. The interest rate is 5% annual compounded monthly?

3. The interest rate is 5% annual compounded continuously?

10 You are considering buying a 10 year corporate bond that has a par value of $500 and pays 5% annually. The bond is selling for $350.

1. What is the current rate of this bond?

2. What is the yield to maturity of this bond?