PROBLEMS

1. Go to the Federal Reserve Web site, http://www.federalreserve.gov. Click on the Consumer Information tab, and research consumer credit in the various hyperlinks. Find average interest rates charged by commercial banks on new automobile loans, personal loans, and credit card plans.

a. Compare the average level of interest rates among the three types of loans.

b. Click on the Economic Research & Data tab, click on the "Statistics: Releases and Historical Data" hyperlink and then "Consumer Credit," and compare trends in the cost of consumer credit provided by commercial banks over the past three years.

2. Find the FV of $10,000 invested now after five years if the annual interest rate is 8 percent.

a. What would be the FV if the interest rate is a simple interest rate?

b. What would be the FV if the interest rate is a compound interest rate?

3. Determine the future values (FVs) if $5,000 is invested in each of the following situations:

a. 5 percent for ten years
b. 7 percent for seven years
c. 9 percent for four years

4. You are planning to invest $2,500 today for three years at a nominal interest rate of 9 percent with annual compounding.

a. What would be the future value (FV) of your investment?

b. Now assume that inflation is expected to be 3 percent per year over the same three-year period. What would be the investment's FV in terms of purchasing power?

c. What would be the investment's FV in terms of purchasing power if inflation occurs at a 9 percent annual rate?

5. Find the present value (PV) of $7,000 to be received one year from now assuming a 3 percent annual discount interest rate. Also calculate the PV if the $7,000 is received after two years.