﻿ Finance Review

# Finance Review Lab

### Objectives

• Practice solving finance problems.
• Practice creating charts.

### Introduction

This laboratory exercise is devoted to practicing for the finance test. The problems in this lab are representative of those you will be required to solve on the test. You should make every effort to solve all of these problems before taking the finance test.

This lab only includes problems dealing with compound interest. It does not include problems dealing with markups and discounts, simple interest, or credit cards. Use the sample test to see what kinds of problems will be on the finance test.

### Problem 1

A. How much interest will be earned on an investment of \$1,000 at 5.5% compounded monthly for 7 years? What is the annual percentage yield for this investment?

B. Prepare a table showing how the balance grows during the term of this investment.

C. Prepare a chart illustrating the growth in the balance.

D. What if the interest rate decreases to 1.2% compounded monthly? Find the future value, the total interest earned, and the APY.

E. Go back to the original interest rate of 5.5% compounded monthly. Use your model to determine what investment would be needed to yield a future value of \$2,000.

### Problem 2

A. What is the purchase price of a \$500 savings bond that pays 4.6% compounded quarterly and matures in 6 years? What is the annual percentage yield for this investment?

B. Prepare a table showing how the value of the savings bond grows during the term of this investment.

C. Prepare a chart illustrating the growth in the balance.

D. What is the purchase price of a \$900 savings bond?

E. Set the future value back to \$500 and use your model to determine what interest rate would result in a purchase price of \$350.

### Problem 3

A. What is the monthly payment on a 5-year car loan of \$10,000 at a nominal annual rate of 6.9%? What is the annual equivalent rate for this loan? The annual equivalent rate (AER) is another name for the annual percentage rate (APR).

B. Find the total interest that will be paid on this loan.

C. Prepare an amortization table for this loan.

D. Create a chart illustrating how the balance due decreases over the term of the loan.

E. Create chart showing how each payment is divided between interest and balance reduction.

F. What would the monthly payments be if the nominal rate fell to 0.9% compounded monthly?

G. Use your model to find the interest rate that would result in monthly payments of \$200.

### Problem 4

A. How much you would need to put into your savings account each month if the account paid 3.2% compounded monthly and you hoped to save \$20,000 in 18 years? What is the annual percentage yield for this investment?

B. Find the total interest earned during the 18-year term.

C. Use your model to determine how long it would take to save \$20,000 if you could invest \$100 a month.

D. Change the number of years back to 18 and prepare a table showing how the balance in this account grows over time.

E. Create a chart illustrating how the balance grows over time.

### Problem 5

A. Assuming monthly payments, how much interest will be paid on a 25-year mortgage of \$80,000 at 8.19% compounded monthly? What is the annual percentage rate for this loan?

B. Suppose the customer took out a 30-year mortgage instead. How much are the monthly payments and how much interest will be paid?

C. Set the number of years back to 25 and prepare a table showing how the balance due on this mortgage decreases over time.

D. Create a chart illustrating how the balance decreases.

E. Create a chart showing how each payment is divided between interest and balance reduction.

F. What interest rate would allow the homeowner to pay off this mortgage with payments of \$500 a month?

You can check your work on the Solutions page.