Math 95 – Homework Unit 1 – Page 1 Math Fundamentals for Statistics II (Math 95) Homework Unit 1: Finance Scott Fallstrom and Brent Pickett “The ‘How’ and ‘Whys’ Guys” This work is licensed under a Creative Commons Attribution- NonCommercial-ShareAlike 4.0 International License 2 nd Edition (Summer 2016)
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Math 95 – Homework Unit 1 – Page 1
Math Fundamentals for Statistics II (Math 95)
Homework Unit 1:
Finance
Scott Fallstrom and Brent Pickett “The ‘How’ and ‘Whys’ Guys”
This work is licensed under a Creative Commons Attribution-
NonCommercial-ShareAlike 4.0 International License 2nd Edition (Summer 2016)
Math 95 – Homework Unit 1 – Page 2
1.1: Starting Simple Vocabulary and symbols – write out what the following mean:
Principal, P Term, t Interest Rate, r Simple Interest, I
trPI Future Value Present Value trPFV 1
Add-on Interest Average Daily Balance
(ADB)
Concept questions: 1. Why is the present value the same as the principal?
2. When dealing with simple interest, why does the amount of time on the interest rate and the term have
to match?
3. Rebekah is computing simple interest based on a principal of $400 with 5% annual simple interest for 8 months and she does 000,1685400 I . Explain her mistakes.
4. Leah is computing simple interest based on a principal of $400 with 5% annual simple interest for 8 months and she does 160805.0400 I . Explain her mistakes.
5. Joshua is computing simple interest based on a principal of $400 with 5% annual simple interest for 8
months and she does 000,1612
85400
I . Explain his mistakes.
6. What type of sequence is simple interest similar to: arithmetic or geometric? Explain why.
7. Simple interest earns interest on the principal and any interest in the account. True or false? Explain.
8. In the finance formulas, what does it mean to be in capital letters and why is this important?
Exercises: 9. Find the amount of simple interest from the following:
a. A loan of $1,200 at 4.25% annual simple interest for 5 years. b. A loan of $15,200 at 7.25% annual simple interest for 15 years. c. A loan of $15,200 at 7.25% annual simple interest for 15 months. d. An investment of $5,900 at 2.25% monthly simple interest for 15 years. e. An investment of $5,900 at 2.25% monthly simple interest for 15 months. f. An investment of $5,900 at 2.25% annual simple interest for 15 years. g. An investment of $5,900 at 2.25% annual simple interest for 15 days. h. The interest on a payday loan of $50 at 460.42% annual simple interest for 14 days. i. The interest on a payday loan of $50 at 460.42% annual simple interest for 1 month. j. The interest on a payday loan of $50 at 460.42% annual simple interest for 1 year. k. The interest on an investment of $50,000 at 46.42% monthly simple interest for 6 months.
Math 95 – Homework Unit 1 – Page 3
10. Solve these simple interest problems for the missing piece (all are from California).
a. MoneyTree® offers a loan that charges $45 on a loan of $255 for 14 days. What is the annual simple interest rate?
b. MoneyTree® offers a loan that charges $45 on a loan of $255 for 14 days. What is the daily simple interest rate?
c. MoneyTree® offers a loan that charges $26.47 on a loan of $150 for 14 days. What is the annual simple interest rate?
11. Solve these simple interest problems for the missing piece (all are from Washington state). a. MoneyTree® offers a loan that charges $37.50 on a loan of $250 for 14 days. What is the annual
simple interest rate? b. MoneyTree® offers a loan that charges $60 on a loan of $400 for 14 days. What is the annual simple
interest rate? c. MoneyTree® offers a loan that charges $95 on a loan of $700 for 14 days. What is the annual simple
interest rate? 12. Solve these simple interest problems for the missing piece.
a. Find the annual simple interest rate for a loan of 45 days requiring $50 interest on principal of $650. b. Find the annual simple interest rate for a loan of 4 years requiring $700 interest on principal of
$6,500. c. Find the annual simple interest rate for a loan of 60 months with $2,350 interest on principal of
$32,000. d. Find the monthly simple interest rate for a loan of 60 months with $2,350 interest on principal of
$32,000. e. Find the principal needed to earn $75 in interest on 6% annual simple interest over 3 years. f. Find the principal needed to earn $27 in interest on 5% monthly simple interest over 3 months. g. Find the principal needed to earn $79 in interest on 5% annual simple interest over 3 months. h. Find the principal needed to earn $370 in interest on 4.3% annual simple interest over 45 days. i. Find the time needed to earn $50 in interest on an investment of $500 at 5% annual simple interest. j. Find the time needed to earn $700 in interest on an investment of $500 at 4% annual simple interest. k. Find the time needed to earn $700 in interest on an investment of $500 at 4% monthly simple
interest. 13. What is the future value of …
a. $950 at 3% annual simple interest for 13 months? b. $950 at 4.75% annual simple interest for 13 months? c. $950 at 4.75% monthly simple interest for 13 months? d. $1,950 at 11.25% annual simple interest for 13 days? e. $1,950 at 11.25% annual simple interest for 13 years?
14. Determine the present value that will yield a future value of…
a. $3,500 at 5% annual simple interest for 2 years. b. $2,400 at 13% annual simple interest for 2 months. c. $2,400 at 13% monthly simple interest for 2 months. d. $2,400 at 13% annual simple interest for 2 days. e. $29,400 at 8% annual simple interest for 2 years. f. $59,400 at 18% annual simple interest for 20 years.
Math 95 – Homework Unit 1 – Page 4
15. Determine the monthly payment and total interest paid for the following add-on interest loans. a. The principal amount is $850 at 9% annual simple interest for 2 years. b. The principal amount is $58,000 at 3.75% annual simple interest for 7 years. c. The principal amount is $58,000 at 3.75% annual simple interest for 2 years. d. Explain the reason for choosing the 7 year loan (above) instead of the 2 year loan (above). e. Explain the reason for choosing the 2 year loan (above) instead of the 7 year loan (above).
To help, it is good to remember the following about our calendar and the number of days in each.
January – 31 February – 28 (or 29) March – 31 April – 30 May – 31 June – 30 July – 31 August – 31
September – 30 October – 31 November – 30 December – 31 Rule of Thumb – Credit Card Finance Charge: A rule of thumb for determining the finance charge is to take the interest rate and divide by 12, then round to the nearest half (0.5, 1, 1.5, etc). Move the decimal place on the principal two to the left, then multiply the two. Example: $3,000 at 14% annual simple interest over June. Work: 11214 and 30000,3 . Multiply 1 × 30 = 30. So the finance charge will be about $30. 16. Use the rule of thumb to estimate the finance charge for the following:
a. $1,000 at 18% annual simple interest over July. b. $5,000 at 13% annual simple interest over April. c. $25,000 at 11% annual simple interest over August. d. $40,000 at 5% annual simple interest over January.
17. Determine the finance charge for the credit card based on the following information:
a. ADB is $1,100 at 19.99% annual simple interest over June. b. ADB is $15,762 (average American credit card debt) at 14.9% annual simple interest (average
American credit card rate) over September. c. ADB is $152 at 17.99% annual simple interest over January. First – ballpark this and decide if you
think the finance charge will be less than $5, between $5 and $15, or more than $15? 18. Determine (i) the finance charge, (ii) the new balance, and (iii) the minimum payment amount. Assume
the credit card requires 3% rounded up to nearest $5. a. Peter has a credit card with an ADB of $3,694.78, with a remaining balance of $3,753.91. His
interest rate is 16.99% simple interest over December. b. Ophelia has a credit card with an ADB of $984.28, with a remaining balance of $890.25. Her
interest rate is 22.99% simple interest over March. c. The average American. ADB is $15,762 (average American credit card debt) at 14.9% annual
simple interest (average American credit card rate) over April, with remaining balance of $16,100. d. The average American. ADB is $15,762 (average American credit card debt) at 14.9% annual
simple interest (average American credit card rate) over May, with remaining balance of $16,100. e. The average American. ADB is $15,762 (average American credit card debt) at 23.9% annual
simple interest over May, with remaining balance of $16,100.
Wrap-up and look back: 19. What is the difference between present value and future value?
Math 95 – Homework Unit 1 – Page 5
20. What is the difference between trPI and trPFV 1 ? When would you use each?
21. In order to get $5,000 in 3 months, do we need to invest more than $5,000, less than $5,000, or exactly
$5,000? At least 1 is correct. Explain.
22. Write in words what you learned from this section. Did you have any questions remaining that weren’t covered in class? Write them out and bring them back to class.
1.2: Compounding Problems Vocabulary and symbols – write out what the following mean:
Periodic Rate , i
nt
nrPFV 1
ntiPFV 1
Future Value Interest Factor (FVIF Table) Concept questions: 1. What is the difference between the interest rate, r, and the periodic rate, i? 2. If the interest rate is 6% annual interest, will the periodic rate be higher or lower than this? Explain.
3. If the interest rate is 6% annual interest, which periodic rate is higher: quarterly or monthly? Explain.
4. If the interest rate is 6% annual interest, which periodic rate is higher: bi-weekly or semi-monthly?
Explain.
5. If the interest rate is 6% annual interest, which periodic rate is higher: semi-annually or quarterly? Explain.
6. Why is the future value of simple interest nearly the same as compound interest when the amount of
time is short?
7. Why is the future value of simple interest so much less than compound interest when the amount of time is long?
8. If the present value is less than the future value, is the investment making money or losing it? Why?
Exercises: This table may be helpful during the homework and these are the most common periods: Time Measurement # of Compounding Periods Time Measurement # of Compounding Periods
Annually 1 Semi-Annually 2 Quarterly 4 Monthly 12
Semi-Monthly 24 Bi-weekly 26 Weekly 52 Daily 365
Math 95 – Homework Unit 1 – Page 6
9. Find the periodic rate for these rate and compound time values. a. 36% annual interest, quarterly. b. 36% annual interest, annually. c. 36% annual interest, semi-annually.
d. 4.25% annual interest, quarterly. e. 18% annual interest, monthly. f. 18% annual interest, daily.
10. Find the future value of $20,000 at 6% annual interest compounded monthly after: (a) 3 months, (b) 1
year, (c) 10 years, (d) 30 years. Compare each with the value using 6% annual simple interest. Round to
the nearest penny at the end of the computations.
11. Explore with compound interest:
a. Determine the future value of $9,000 at 2.99% annual interest compounded weekly for 10 years, and determine the amount of interest earned.
b. Determine the future value of $4,500 at 7.49% annual interest compounded monthly for 13 months, and determine the amount of interest earned.
c. Determine the future value of $4,500 at 7.49% annual interest compounded monthly for 15 years, and determine the amount of interest earned.
d. Determine the present value of $19,000 at 5% annual interest compounded daily for 7 years, and determine the amount of interest earned.
e. Determine the present value of $19,000 at 5% annual interest compounded monthly for 7 months, and determine the amount of interest earned.
f. Determine the present value of $650,000 at 5.6% annual interest compounded monthly for 27 years, and determine the amount of interest earned.
12. Try out a few more problems using inflation.
a. The long term average inflation rate for health care prices is 5.42% annually. If a health care plan costs $912 per month now…
i. What is the annual health care cost now? ii. What is the annual health care cost 20 years from now?
iii. What would be the monthly health care cost 20 years from now?
b. If wages and salaries are rising at about 1.5% annually. If a job has a salary of $59,000 per year now, how much would that salary be 15 years from now?
c. Assuming that inflation is 2.2% annually, and you currently pay $3.19 for gas…
i. How much will you pay for gas 20 years from now?
ii. How much would you have paid for gas 10 years ago? (Hint – use a negative exponent!)
d. Tuition has been rising at about 7% annually for the past 30 years. If this continues, how much
would the tuition be at UCSD in 20 years ($26,738 per year in 2016)?
Math 95 – Homework Unit 1 – Page 7
TABLE 1 (Part 1 of 2) (FVIF – Future Value Interest Factor for 1% to 7%)
13. Using the tables, compute the following. Find the… a. future value of investing $4,000 at 5% annual interest compounded annually for 19 years. b. future value of investing $8,000 at 24% annual interest compounded monthly for 3 years. c. future value of investing $8,000 at 24% annual interest compounded monthly for 21 months. d. future value of investing $5,800 at 10% annual interest compounded semi-annually for 6 years. e. future value of investing $11,900 at 13% annual interest compounded annually for 27 years. f. future value of investing $8,300 at 40% annual interest compounded quarterly for 8 years.
Wrap-up and look back:
14. When would you use trPFV 1 instead of ntiPFV 1 ? Explain.
15. If using ntiPFV 1 as a way to save for retirement, what is the drawback?
16. Would you use ntiPFV 1 for a lump sum investment, or for making payments into an account?
17. What are the benefits and drawbacks to the FVIF table? Explain.
18. Is there a difference between 5% annual simple interest and 5% annual interest compounded annually: a. after one year? b. after 5 years? c. after 20 years?
19. Write in words what you learned from this section. Did you have any questions remaining that weren’t covered in class? Write them out and bring them back to class.
1.3: A Better Way to Save - Annuities
Vocabulary and symbols – write out what the following mean:
Annuity Future Value Interest Factor Annuity (FVIFA)
i
ipmtFV
nt 11
Concept questions:
1. Compare and contrast these formulas:
i
ipmtFV
nt 11 , trPFV 1 , and ntiPFV 1 .
2. To get to the same place as investing with a lump sum compound interest account, will the total of all the payments need to be more than the lump sum, less, or the same? Explain.
Exercises:
3. Try some annuity calculations using the FVIFA tables. a. If you invest $6,500 each year in an account earning 8% annual interest compounded annually, how
much would you have in 11 years? [$6,500 = max annual contribution to Roth IRA, 50+ yrs old.] b. If you invest $24,000 each year in an account earning 7% compounded annually, how much would
you have in 18 years? [$24,000 = max annual contribution to a 401k account, 50+ yrs old.] c. If you invest $80 each month into an account earning 5% annual interest compounded annually,
how much would you have in 25 years? [Hint: make the $80 per month into an annual payment] d. If you invest $100 each month into an account earning 5% annual interest compounded annually,
how much would you have in 35 years? [Hint: make the $100 per month into an annual payment] e. According to Edmunds.com, the average monthly payment for a used vehicle is $355 per month for
60 months (5 years). Instead of buying the car, if you invest $355 each month at 7% annual interest compounded annually, how much would you have in 5 years?
Math 95 – Homework Unit 1 – Page 10
TABLE 2 (Part 1 of 2) (FVIFA – Future Value Interest Factor Annuity for 1% to 7%)
4. Try some annuity investing on your own using the formula. a. If you invest 12% of your income and make $4,000 each month, how much will you have in 30
years if you invest at 6% annual interest compounded monthly? Also, determine how much interest was earned.
b. If you invest 12% of your income and make $4,000 each month, how much will you have in 25 years if you invest at 6% annual interest compounded monthly? Also, determine how much interest was earned.
c. If you invest 12% of your income and make $4,000 each month, how much will you have in 20 years if you invest at 6% annual interest compounded monthly? Also, determine how much interest was earned.
d. If you invest 12% of your income and make $4,000 each month, how much will you have in 15 years if you invest at 6% annual interest compounded monthly? Also, determine how much interest was earned.
e. If you invest 12% of your income and make $4,000 each month, how much will you have in 10 years if you invest at 6% annual interest compounded monthly? Also, determine how much interest was earned.
f. If you invest 6% of your income and make $4,000 each month, how much will you have in 30 years if you invest at 6% annual interest compounded monthly? Also, determine the interest earned.
g. If you invest 12% of your $4,000 monthly income for 10 years at 6% annual interest compounded monthly, and then left it sitting in the account for the next 20 years… how much would you have total? Also, determine how much interest was earned.
h. Which is better – invest $0 for 10 years then 12% for 20 years or 12% for 10 years and then $0 for 20 years?
5. Invest with Annuities a few more times.
a. If you invest $5,500 each year for a Roth IRA, and you do this for 22 years, how much will be in the account if it earns 7% annual interest compounded annually. (use the table AND the formula – this assumes you start investing at age 45 and finish at age 67 so you can retire) Figure out how much you paid in and how much interest was earned.
b. Someone who is over 50 years old can “catch-up” with extra money into the Roth. If you invest $6,500 each year for a Roth IRA, and you do this for 17 years (age 50 to 67 only), how much will be in the account if it earns 7% annual interest compounded annually. (use the table AND the formula). Figure out how much you paid in and how much interest was earned.
c. If you invest $5,500 each year for a Roth IRA, and you do this for 10 years (from age 30 to age 40), then stop investing completely. How much would you have at age 67 when you retire? Assume 7% annual interest compounded annually. Determine how much you paid in and the amount of interest.
d. If you invested $5,500 from age 30 to age 50, then invested $6,500 from age 50 to age 67, determine how much money you would have in the account. Assume 7% annual interest compounded annually. Determine how much you paid in and the amount of interest.
Math 95 – Homework Unit 1 – Page 13
6. Work some annuities backwards – find the payment.
a. How much money do you need to invest each month at 5% annual interest compounded monthly for 18 years to end with $60,000 (for your baby’s education)? Determine how much interest you will earn.
b. How much money do you need to invest each month at 6% annual interest compounded monthly for 32 years to end with $1,000,000 (for your retirement)? Determine how much interest you will earn.
c. Because of extraordinary circumstances, your friend is now 55 years old and hasn’t started saving for retirement yet. She wants to have $250,000 when she retires at age 70. How much should she invest each month at 6% annual interest compounded monthly? Determine how much interest she will earn.
d. Because of extraordinary circumstances, your friend is now 45 years old and hasn’t started saving for retirement yet. She wants to have $250,000 when she retires at age 70. How much should she invest each month at 6% annual interest compounded monthly? Determine how much interest she will earn.
e. Another friend will start investing at age 25 until age 70, how much should she invest each month at 6% annual interest compounded monthly to end with the $250,000? How much more would it cost her to have $500,000? Or $1,000,000?
7. You could use the FVIFA table to find the payment instead of the future value. Since
i
ipmtFV
nt 11 becomes factorFVIFA pmtFV , this shows why we multiply to get the
future value. To undo this, we divide the future value by the FVIFA factor and that will be the
payment!
a. Find the monthly payment that will generate a future value of $35,000 at 24% annual interest compounded monthly for 3 years. (use the table)
b. Find the annual payment that will generate a future value of $500,000 at 7% annual interest compounded annually for 30 years. (use the table)
c. Find the annual payment that will generate a future value of $750,000 at 7% annual interest compounded annually for 40 years. (use the table)
Wrap-up and look back:
8. Would you use
i
ipmtFV
nt 11 for a lump sum investment, or for making payments into an
account? 9. Based on what we saw in this unit, why is there so much advice to “start investing early”? Explain. 10. Write in words what you learned from this section. Did you have any questions remaining that weren’t
covered in class? Write them out and bring them back to class.
Math 95 – Homework Unit 1 – Page 14
1.4: Dreams Come True – Mortgage/Amortized Loans Vocabulary and symbols – write out what the following mean:
Amortized Loan Mortgage
i
ipmtiP
ntnt 11
1
Concept questions:
1. In the formula i
ipmtiP
ntnt 11
1
, what does the ntiP 1 represent?
2. In the formula i
ipmtiP
ntnt 11
1
, what does the
i
ipmt
nt 11 represent?
3. Using the Amortization Factor Table, Shawn is trying to find out the payment on a $35,000 loan at 4% annual interest compounded monthly for 2 years. He does $3,500 × 43.4249… is this correct? Explain any errors.
4. While computing the monthly payment i
ipmtiP
ntnt 11
1
, David notices that the left portion
ntiP 1 is equal to $1,000,000. Does that mean that if he adds up all his payments, he will pay back $1,000,000? Explain.
5. Once you have the monthly payment, how can you determine the amount of interest paid?
6. In order to compute the interest on an amortized loan, Charleen uses trPI . Why will this not
work?
7. Which loan is probably going to default (fail to be paid) more – a shorter loan or a longer loan?
8. Why is the longer loan usually associated with a higher interest rate?
Exercises: 9. Use the formula to find the monthly payment and the amount of interest paid.
a. A mortgage of $455,000 at 3.75% annual interest compounded monthly for 30 years. b. A student loan of $32,000 at 4.29% annual interest compounded monthly for 10 years.
Math 95 – Homework Unit 1 – Page 15
10. Use the table (Amortization Factor Table) to find the monthly payment of… a. a home loan for $450,000 at 3% annual interest compounded monthly for 25 years? Then determine
the total amount paid and the amount of interest paid. b. a home loan for $315,000 at 7% annual interest compounded monthly for 30 years? Then determine
the total amount paid and the amount of interest paid. c. a home loan for $297,000 at 2% annual interest compounded monthly for 15 years? Then determine
the total amount paid and the amount of interest paid. d. a car purchased for $29,000 at 4% annual interest compounded monthly for 3 years. What is the
monthly payment? Determine the total amount paid and the amount of interest paid. e. a car purchased for $29,000 at 4% annual interest compounded monthly for 4 years. What is the
monthly payment? Determine the total amount paid and the amount of interest paid. f. a car purchased for $29,000 at 4% annual interest compounded monthly for 5 years. What is the
monthly payment? Determine the total amount paid and the amount of interest paid. g. As we expand the amount of time to pay off the car loan, what happens to (i) the monthly payment
and (ii) the interest paid? h. The maximum length of time for a car loan is now up to 84 months (7 years). Explain why it is not a
good idea to finance a car over 7 years.
11. Use the formula to determine the amount of loan that will match the information given. a. You can afford $320 per month for a car; determine how much of a loan amount you can afford for
3 years at 3.25% annual interest compounded monthly. Round loan amount down to the nearest dollar.
b. You can afford $320 per month for a car; determine how much of a loan amount you can afford for 4 years at 3.35% annual interest compounded monthly. Round loan amount down to the nearest dollar.
c. You can afford $320 per month for a car; determine how much of a loan amount you can afford for 5 years at 3.45% annual interest compounded monthly. Round loan amount down to the nearest dollar.
d. You can afford $320 per month for a car; determine how much of a loan amount you can afford for 6 years at 3.65% annual interest compounded monthly. Round loan amount down to the nearest dollar.
e. You can afford $320 per month for a car; determine how much of a loan amount you can afford for 7 years at 3.95% annual interest compounded monthly. Round loan amount down to the nearest dollar.
f. Based on the job you plan to have, you know that you can afford a maximum loan payment of $285 per month to pay back your student loans. What is the maximum amount of student loans you could have at 4.29% annual interest compounded monthly over 10 years (the actual rate for direct unsubsidized loans for undergraduate students)?
Math 95 – Homework Unit 1 – Page 16
AMORTIZATION FACTOR TABLE 3 – PER $1,000 FINANCED (1% to 8% compounded monthly)
12. Compare the two loans listed. a. Compare an add-on interest loan on $150,000 over 10 years at 4% annual simple interest with an
amortized loan for $150,000 over 10 years at 7% annual interest compounded monthly. Analyze the good and bad of each loan to see which you would prefer and why.
b. Compare an add-on interest loan on $375,000 over 30 years at 3% annual simple interest with an amortized loan for $375,000 over 30 years at 8.25% annual interest compounded monthly. Analyze the good and bad of each loan to see which you would prefer and why.
c. Compare an amortized loan on $375,000 over 30 years at 3.75% annual interest compounded monthly with an amortized loan for $375,000 over 15 years at 2.8% annual interest compounded monthly. Analyze the good and bad of each loan to see which you would prefer and why.
d. Compare an amortized loan on $32,000 over 3 years at 3.99% annual interest compounded monthly with an amortized loan for $32,000 over 5 years at 4.49% annual interest compounded monthly. Analyze the good and bad of each loan to see which you would prefer and why.
13. Business Loans:
a. If a business loan of $420,000 requires quarterly payments, and the interest is 7.7% annual interest compounded quarterly, how much is the payment if it is to be paid off in 5 years? How much total will be paid back (principal and interest)?
b. If a business loan of $420,000 requires interest-only monthly for 5 years and then the amount is due back in full. The interest is 7.7% annual interest compounded monthly, how much is the monthly interest-only payment? How much total will be paid back?
c. If a business takes an add-on interest loan of $420,000. It is a loan for 5 years and the interest is 7.7% annual simple interest, how much is the monthly payment? How much total will be paid back?
d. Compare the 3 options. What are the good and bad of each?
14. Determine the amount to be paid each month to pay off the balance. a. If the car loan has a balance of $8,900 and the interest rate is 6.8% annual interest compounded
monthly, what is the amount needed to be paid each month to have this paid off in 4 years? b. If the car loan has a balance of $8,900 and the interest rate is 6.8% annual interest compounded
monthly, what is the amount needed to be paid each month to have this paid off in 18 months? c. How much interest is saved from (a) to (b) – paying the car loan off in 2.5 fewer years? d. If the home loan has a balance of $238,900 and the interest rate is 3.8% annual interest compounded
monthly, what is the amount needed to be paid each month to have this paid off in 12 years? e. If the home loan has a balance of $238,900 and the interest rate is 3.8% annual interest compounded
monthly, what is the amount needed to be paid each month to have this paid off in 10 years? f. How much interest is saved from (d) to (e) – paying the mortgage off in 2 fewer years? g. A credit card has a balance of $3,215 and your friend wants to pay it off over 3 years. The interest
rate is 17.99% annual interest compounded monthly – what monthly payment is needed? h. A credit card has a balance of $3,215 and your friend wants to pay it off over 1 year. The interest
rate is 17.99% annual interest compounded monthly – what monthly payment is needed? i. How much interest is saved from (g) to (h) – paying the credit card in 2 fewer years?
Math 95 – Homework Unit 1 – Page 18
Wrap-up and look back: 15. True/False (explain if your answer is false):
a. Add-on interest loans charge interest on the remaining balance. b. Amortized loans charge interest on the remaining balance. c. Amortized loans charge interest on the loan amount only. d. Add-on interest loans have equal monthly payments. e. The interest paid on amortized loans is calculated with trPI . f. The interest paid on add-on interest loans is calculated with trPI . g. Paying extra on amortized loans will save you time. h. Paying extra on amortized loans will save you money. i. Paying extra on add-on interest loans will save you time. j. Paying extra on add-on interest loans will save you money.
16. Why is it sometimes better to take an amortized loan with a higher interest rate than an add-on interest loan with a lower interest rate?
17. Write in words what you learned from this section. Did you have any questions remaining that weren’t covered in class? Write them out and bring them back to class.
1.5: The Trouble with Compound Interest (Mortgages) Vocabulary and symbols – write out what the following mean:
P & I payment Amortiation Schedule Unpaid Balance
i
ipmtiPUB
kk 11
1
Concept questions: 1. Why is the total payment on a mortgage not the same as the P & I payment?
2. In the unpaid balance formula, why is the exponent k instead of nt?
3. In the unpaid balance formula, what does the kiP 1 portion relate to?
4. In the unpaid balance formula, what does the
i
ipmt
k 11 portion relate to?
5. Why do we round the P & I payment up to the nearest penny?
6. Why is the loan not paid off exactly after making equal payments for the length of the term?
7. In an amortized loan, does the amount you pay to interest stay the same each month? Why or why not?
8. In an amortized loan, does the amount you pay to interest in the first month match the amount paid to
interest in the final month? Why or why not?
Math 95 – Homework Unit 1 – Page 19
Exercises: 9. Determine (i) the monthly P & I payment, (ii) the amount of interest paid in the first month, and (iii) the
amount of the first P & I payment that goes to pay off the remaining balance. a. A mortgage for $475,000 at 4.25% annual interest compounded monthly for 30 years. b. A mortgage for $475,000 at 4.25% annual interest compounded monthly for 15 years. c. Why is the interest paid in the first month the same for (a) and (b)? d. A car loan for $29,000 at 7.25% annual interest compounded monthly for 3 years. e. A car loan for $29,000 at 7.25% annual interest compounded monthly for 6 years. f. In (d) the amount of time is half as long as the loan in (e). How does the payment compare – is it
half as much? 10. For these questions, (i) determine the monthly payment on the loan, (ii) use the unpaid balance formula
to approximate the unpaid balance after 3 years, then (iii) use an amortization schedule/spreadsheet to find the unpaid balance after 3 years on… a. A mortgage on $347,500 at 4.55% annual interest compounded monthly for 30 years. b. A mortgage on $347,500 at 4.25% annual interest compounded monthly for 15 years. c. A car loan on $37,500 at 9.34% annual interest compounded monthly for 5 years. d. A car loan on $37,500 at 9.34% annual interest compounded monthly for 7 years. e. A student loan on $87,500 at 4.29% annual interest compounded monthly for 10 years. f. Is the formula the same as the amount found on the spreadsheet for the unpaid balance?
11. Refer to the previous problem and compute (i) the unpaid balance after 8 years if the initial P&I payment is made and (ii) the unpaid balance after 8 years if the P&I payment is increased by $150 per month for a. A mortgage on $347,500 at 4.55% annual interest compounded monthly for 30 years. b. A mortgage on $347,500 at 4.25% annual interest compounded monthly for 15 years.
12. 12 years ago, Howard took a 30-year mortgage loan for $568,000 at 5.45% annual interest compounded
monthly. He paid the minimum payment each month and never missed a payment. However, he just received an inheritance of $300,000 and wants to pay off the loan completely. a. Does he have enough to pay it off or not? b. If he invests the $300,000 instead of putting it towards the house, and if Howard continues paying
on his amortized loan for 15 total years (half the time), will he have paid off half the loan or not? Explain.
c. How long will it take for his loan to be paid off half way? (use an amortization schedule on the computer)
d. If he added $200 to his payments (for the first 12 years of the loan), how long until the loan was paid off halfway?
Math 95 – Homework Unit 1 – Page 20
13. 12 years ago, Howard took a 30-year mortgage loan for $568,000 at 5.45% annual interest compounded monthly. He paid the minimum payment each month and never missed a payment. However, he just received an offer to refinance the home. There is a fee of 2% of the remaining balance for this offer, but the interest rate will be 4.25% and he could refinance for 30 years, or he could take 3.75% and refinance for 15 years. Analyze all options to see which is best for Howard – stay with current, refi for 30, refi for 15, refi but make current payment still, etc. Explain why. The computer is strongly recommended here for analysis.
14. Yulemi is considering two mortgages on her loan amount of $403,500. The first is a 30 year mortgage at 5.15% annual interest compounded monthly and the second is a 15 year mortgage at 4.48% annual interest compounded monthly. Compare these options and determine which is best for her: a. She takes the 30 year option and makes the 30 year P & I payment for 30 years. b. She takes the 15 year option and makes the 15 year P & I payment for 15 years. c. She takes the 30 year option and makes the 15 year P & I payment until paid off.
Wrap-up and look back: 15. Why is it sometimes better to take the 30 year loan over a 15 year loan? 16. Why is it sometimes better to take the 15 year loan over a 30 year loan? 17. Which one will typically have a higher interest rate: a 15 year loan or a 30 year loan? 18. Write in words what you learned from this section. Did you have any questions remaining that weren’t
covered in class? Write them out and bring them back to class.
1.6: The Joys of Compound Interest (Retirement) Vocabulary and symbols – write out what the following mean:
Time Value of Money Payout Annuity
i
ipmtiP
ntnt 11
1
Concept questions:
1. If we only took out the interest from a retirement account, how long would the account last?
2. Jonathan doesn’t like investing money and so he will stockpile money away for retirement in a fireproof safe in his house – earning no interest at all. a. If Jonathan wanted to be paid $2,500 each month when he retired, how much money would he need
for the payouts to last for 20 years? b. If Jonathan wanted to invest over the 35 years prior to retirement, how much would he need to put
away each month to end with the amount in part (a)? c. If he ended up changing his mind and investing in an account that earned 3.25% interest during
retirement and 5.5% interest during the investment phase… i. How much would he need at retirement to have enough for a payout annuity that would pay
$2,500 each month for 20 years? ii. How much would he need to invest over 35 years to have the amount in (i)?
d. Why is investing, even with low interest rates, better than with none at all?
Math 95 – Homework Unit 1 – Page 21
3. If we computed that we can take out $1,400 each month for the money to last 20 years, will the money
last more, less, or just 20 years if we take out… a. $1,300 each month. b. $2,000 each month. c. $1,400 each month.
Exercises: 4. Michael knows that he needs $3,100 per month to live comfortably now. He plans to retire in about 34
years and plans to be retired for about 18 years after that. Determine… a. how much he needs each month to maintain his current standard of living when he retires 34 years
from now (assuming 2.5% inflation). b. how much he needs to have in his retirement account to be paid out equal monthly amounts of the
amount in (a) each month for 18 years if the account earns 5% annual interest compounded monthly.
c. how much he needs to invest each month at 7% annual interest compounded monthly over the next 34 years in order to have the amount in (b).
d. how much interest he earned over the course of the 52 years. 5. Elizabeth knows that she needs $3,700 per month to live comfortably now. She plans to retire in about
39 years and plans to be retired for about 23 years after that. Determine… a. how much she needs each month to maintain her current standard of living when she retires 39
years from now (assuming 3.1% inflation). b. how much she needs to have in his retirement account to be paid out equal monthly amounts of the
amount in (a) each month for 23 years if the account earns 5% annual interest compounded monthly.
c. how much she needs to invest each month at 7% annual interest compounded monthly over the next 39 years in order to have the amount in (b).
d. how much interest she earned over the course of the 62 years. 6. Abbielee Mueller knows that she needs $2,900 per month to live comfortably now. However, she hasn’t
started saving for retirement and she is 50 years old! She plans to retire in about 20 years and plans to be retired for about 15 years after that. Determine… a. how much she needs each month to maintain her current standard of living when she retires 20
years from now (assuming 3.1% inflation). b. how much she needs to have in his retirement account to be paid out equal monthly amounts of the
amount in (a) each month for 15 years if the account earns 5% annual interest compounded monthly.
c. how much she needs to invest each month at 7% annual interest compounded monthly over the next 20 years in order to have the amount in (b).
d. how much interest she earned over the course of the 35 years. 7. Determine some information with payout annuities.
a. Jon Snow wants to be paid out $3,500 per month over the next 25 years. How much does he need to invest to make this payout happen (both investments use 5.25% annual interest compounded monthly)?
b. Arya Stark wants to be paid out $3,500 per month over the next 25 years. How much does she need to invest to make this payout happen (both investments use 6.75% annual interest compounded monthly)?
Math 95 – Homework Unit 1 – Page 22
c. Sansa Stark wants to be paid out $8,750 per month when retired. She will retire 25 years from now and plans to be retired for 15 years. Her investments all earn 6.15% annual interest compounded monthly.
i. How much will she need to invest at retirement to guarantee 15 years of payouts? ii. How much will she need to invest each month for the next 25 years of work?
iii. How much interest will she earn over the 40 years total? iv. If Sansa had some cash now, as a wedding gift from Petyr Baelish, and she wanted to invest
this lump sum instead of making monthly payments, how much would she need to invest to get to the retirement amount in (i)?
v. How much total interest would she earn over the 40 years if she chose this option? 8. Practice a few times to find (i) the amount of the cash prize in a lottery and (ii) the amount that the
winner would actually claim for taking the cash prize after the 39.6% federal tax bill… a. for a $3 million lottery, assuming 4% annual interest compounded annually and that the prize is
paid out at the same amount each year for 25 years. b. for a $3 million lottery, assuming 5% annual interest compounded annually and that the prize is
paid out at the same amount each year for 25 years c. for a $6 million lottery, assuming 2.5% annual interest compounded annually and that the prize is
paid out at the same amount each year for 25 years d. for a $24 million lottery, assuming 2.5% annual interest compounded annually and that the prize is
paid out at the same amount each year for 25 years. e. for a $24 million lottery, assuming 2.5% annual interest compounded annually and that the prize is
paid out at the same amount each year for 30 years. f. for a $40 million lottery, assuming 2.85% annual interest compounded annually and that the prize is
paid out at the same amount each year for 30 years. g. for a $903 million lottery, assuming 3.25% annual interest compounded annually and that the prize
is paid out at the same amount each year for 30 years. h. for a $903 million lottery, assuming 5.4% annual interest compounded annually and that the prize is
paid out at the same amount each year for 30 years. Wrap-up and look back: 9. If the interest rate is lower, do we need to invest more or less money to guarantee the payouts? Why? 10. Is the cash prize higher or lower if the interest rate decreases? Explain why.
11. Why is it so important to use inflation rates to determine monthly payments at retirement? 12. If you had to choose between monthly payment investing for retirement and lump sum investing, which
would… a. be easier for you to handle? b. earn more interest? c. have a larger amount of total cash needed?
13. Explain why the cash prize for a lottery is so much less than the listed annuity prize. 14. If the annuity and cash prizes were close in value, would you suspect high interest rates or low interest
rates for the state? Why?
Math 95 – Homework Unit 1 – Page 23
15. If someone won the lottery, give reasons for taking the cash prize as well as reasons for taking the
annuity.
16. Write in words what you learned from this section. Did you have any questions remaining that weren’t covered in class? Write them out and bring them back to class.
1.7: COLA, but not soda Vocabulary and symbols – write out what the following mean:
Cost of Living Adjustment
cr
r
c
pmtP
t
1
11
Concept questions: 1. Why does the cost of living change over time? 2. Why is there a problem with receiving fixed payments over time?
3. Bertha is thinking of investing in an annuity to last for 20 years with an initial payment of $32,000,
with COLA of 2% and rate of 5.9% annual interest compounded annually. Marlesha is thinking of investing in an annuity to last for 20 years with an initial payment of $32,000, with COLA of 2% and rate of 4.9% annual interest compounded annually. Without doing any computations, determine who should have a bigger up-front cost?
4. Buddy is thinking of investing in an annuity to last for 20 years with an initial payment of $32,000,
with COLA of 3% and rate of 5.9% annual interest compounded annually. Manny is thinking of investing in an annuity to last for 20 years with an initial payment of $32,000, with COLA of 2% and rate of 5.9% annual interest compounded annually. Without doing any computations, determine who should have a bigger up-front cost?
5. Which of these accounts will need a larger initial investment:
a. an account that earns 5% annual interest with 2% COLA. b. an account that earns 5% annual interest with 3% COLA.
6. Which of these accounts will need a larger initial investment:
a. an account that earns 7% annual interest with 2% COLA. b. an account that earns 5% annual interest with 2% COLA.
Exercises: 7. If the first payment from a COLA payout annuity is $25,000, and the COLA is 3%, determine…
a. The amount of the 1st payment. b. The amount of the 2nd payment. c. The amount of the 3rd payment.
d. The amount of the 10th payment. e. The amount of the 21st payment. f. The amount of the 31st payment.
Math 95 – Homework Unit 1 – Page 24
8. If the first payment from a COLA payout annuity is $25,000, and the COLA is 2.3%, determine… a. The amount of the 1st payment. b. The amount of the 2nd payment. c. The amount of the 3rd payment.
d. The amount of the 10th payment. e. The amount of the 21st payment. f. The amount of the 31st payment.
9. If the first payment from a COLA payout annuity is $25,000, and the COLA is 3.5%, determine…
a. The amount of the 1st payment. b. The amount of the 2nd payment. c. The amount of the 3rd payment.
d. The amount of the 10th payment. e. The amount of the 21st payment. f. The amount of the 31st payment.
10. Using the COLA payout annuity formula, determine the amount of money needed if…
a. The annuity is to last for 25 years with an initial payment of $32,000, with COLA of 3% and rate of 5.9% annual interest compounded annually.
b. The annuity is to last for 20 years with an initial payment of $32,000, with COLA of 3% and rate of 5.9% annual interest compounded annually.
c. The annuity is to last for 20 years with an initial payment of $32,000, with COLA of 2% and rate of 5.9% annual interest compounded annually.
d. The annuity is to last for 20 years with an initial payment of $32,000, with COLA of 2% and rate of 4.9% annual interest compounded annually.
e. The annuity is to last for 15 years with an initial payment of $32,000, with COLA of 2% and rate of 5.9% annual interest compounded annually.
11. You can use the COLA formula for monthly payments instead of annual, but the interest must be the
periodic rate (using compounded monthly) and the COLA must be monthly as well. EX: if the annual COLA was 4.8%, then the monthly would be 4.8% ÷ 12 = 0.4%. Using the COLA payout annuity formula, determine the amount of money needed if… a. The annuity is to last for 25 years with an initial monthly payment of $2,000, with monthly COLA
of 0.3% and rate of 6.0% annual interest compounded monthly. b. The annuity is to last for 20 years with an initial monthly payment of $2,500, with monthly COLA
of 0.3% and rate of 5.4% annual interest compounded monthly. c. The annuity is to last for 20 years with an initial monthly payment of $2,500, with monthly COLA
of 0.25% and rate of 4.8% annual interest compounded monthly. d. The annuity is to last for 15 years with an initial monthly payment of $3,800, with monthly COLA
of 0.25% and rate of 4.8% annual interest compounded monthly. e. The annuity is to last for 20 years with an initial monthly payment of $7,800, with monthly COLA
of 0.35% and rate of 7.2% annual interest compounded monthly. f. The annuity is to last for 25 years with an initial monthly payment of $9,800, with monthly COLA
of 0.35% and rate of 7.2% annual interest compounded monthly.
12. Marjorie Tyrell has $272,319 in her retirement account. Use a spreadsheet to determine these results. If she earns 4.7% annual interest compounded annually, how long would the payments last if she pulled out a … a. A fixed annual payment of $48,000. b. A first annual payment of $48,000 with an annual COLA of 3%. c. A first annual payment of $48,000 with an annual COLA of 4%.
Math 95 – Homework Unit 1 – Page 25
13. Lucille has $272,319 in her retirement account. Use the formula to determine how much she can get as an annual payment if she wants… a. fixed payments for 20 years and will earn 7% annual interest compounded annually. b. annual payments for 20 years with an annual COLA of 3.2% earning the same interest as (a). c. which of these would you recommend for Lucille and why?
14. In order to determine the total amount paid out from a COLA payout annuity, we can use a formula
we’ve seen before:
i
ipmtFV
nt 11 . When using this formula, the pmt is the first payment made
and the periodic rate is computed using the COLA rate, not the interest rate. The future value will be the sum of all the payments! Determine the amount paid out of these COLA payout annuities: a. First payment of $39,500 with cost of living as 2.8% and interest of 5.75% annual interest
compounded annually, over 20 years. b. First payment of $89,500 with cost of living as 2.5% and interest of 6.15% annual interest
compounded annually, over 25 years. c. First payment of $139,500 with cost of living as 3.1% and interest of 4.75% annual interest
compounded annually, over 13 years. d. First payment of $817,400 with cost of living as 1.9% and interest of 6.99% annual interest
compounded annually, over 30 years. e. First payment of $41,500 with cost of living as 2.8% and interest of 5.75% annual interest
compounded annually, for 9 years. f. First payment of $41,500 with cost of living as 2.8% and interest of 5.75% annual interest
compounded annually, for 19 years. 17. Napolean Dynamite knows that he needs $3,100 per month to live comfortably now. He plans to retire
in about 34 years and plans to be retired for about 18 years after that. Determine… a. how much he needs each month to maintain his current standard of living when he retires 34 years
from now (assuming 2.4% inflation). b. how much he needs to have in his retirement account to be paid out monthly amounts that start with
the amount in (a) but increase by the 2.4% annual inflation each month for 18 years if the account earns 5.1% annual interest compounded monthly.
c. how much he needs to invest each month at 7% annual interest compounded monthly over the next 34 years in order to have the amount in (b).
d. how much he will be paid out of the COLA payout annuity. e. how much interest he earned over the course of the 52 years.
18. Jacquelyn knows that she needs $3,700 per month to live comfortably now. She plans to retire in about
39 years and plans to be retired for about 23 years after that. Determine… a. how much she needs each month to maintain her current standard of living when she retires 39
years from now (assuming 3.6% inflation). b. how much she needs to have in her retirement account to be paid out monthly amounts that start
with the amount in (a) but increase by the 3.6% annual inflation each month for 23 years if the account earns 6% annual interest compounded monthly.
c. how much she needs to invest each month at 7% annual interest compounded monthly over the next 39 years in order to have the amount in (b).
d. how much she will be paid out of the COLA payout annuity. e. how much interest she earned over the course of the 62 years.
Math 95 – Homework Unit 1 – Page 26
19. Consider the previous problem and determine how much she would need to invest if the payments were going to be fixed monthly payments instead of COLA. a. Compare this with the previous information – is it true that she pays more with the COLA account? b. How much more is her monthly payment while preparing for retirement? c. Which option is better for her?
20. Powerball/MegaMillions COLA payments over 30 years. For a Powerball jackpot of $180,000,000,
determine… a. the first payment if the annuity is chosen. b. the cash prize if the interest rate is 2.55% annual interest compounded annually. c. the amount the winner would get if the cash prize is taken and then charged a tax rate of 39.6%
(Federal income tax). 21. Powerball/MegaMillions COLA payments over 30 years. For a Powerball jackpot of $903,000,000,
determine… a. the first payment if the annuity is chosen. b. the cash prize if the interest rate is 3.25% annual interest compounded annually. c. the amount the winner would get if the cash prize is taken and then charged a tax rate of 39.6%
(Federal income tax). 22. If you had to choose between COLA payments for lottery winnings and fixed payments, which one
would you prefer? 23. If you had to choose between COLA payments for lottery winnings and the cash prize, which one
would you prefer?
Wrap-up and look back: 24. What are you risking by choosing the cash prize for a lottery instead of the COLA payments? 25. What are you risking by choosing the COLA payments for a lottery instead of the cash prize?
26. If you were saving for your own retirement, would you want to do flat payments (previous section) or
the COLA payments (this section). Explain why.
27. If investing at 5% annual interest compounded annually,
28. Write in words what you learned from this section. Did you have any questions remaining that weren’t covered in class? Write them out and bring them back to class.
1.8: Everyone Loves a Log, You’re going to Love a Log! Vocabulary and symbols – write out what the following mean:
Logarithm Doubling Time
ipmt
iP
k
1log
1log
Math 95 – Homework Unit 1 – Page 27
Concept questions: 1. The logarithm represents an exponent – true or false? 2. We use logarithms when solving an equation for the exponent – true or false?
3. How can you rewrite x10145 using logarithms?
4. Does the length of time needed to double our money depend on the initial investment, the interest rate, or both?
5. When we use a calculator to solve for a logarithm, is the result an exact value or an approximation?
6. When we check our answer using the calculator, will the value be exact or approximate?
Exercises: 7. Solve the following equations using your calculator. If the answer is not exact, round to 4 decimal
places. Be sure to check your work with each one.
a. 248,83212 n
b. 40005.150 n
c. 12,00004.1500 n
d. 3.210625.1 n
e. 3.2198.020 n
f. 2.45768.06 n
8. Determine how long it would take for the present value to become the future value. a. How long until $30,000 becomes $60,000 at 4.5% annual interest compounded monthly? b. How long until $50,000 becomes $100,000 at 4.5% annual interest compounded monthly? c. How long until $50,000 becomes $200,000 if the rate is 4.5% annual interest compounded
monthly? d. The time in (c) is twice as long as in (b). Explain why this makes sense. e. How long to turn $7,300 into $25,000 if the rate is 6.5% annual interest compounded monthly? f. How long to turn $7,300 into $25,000 if the rate is 6.5% annual interest compounded annually?
9. Hamlet has $60,000 to invest, and wants to turn it into $1,000,000. How many years will it take for this
to happen if he invests at… a. 5% annual interest compounded monthly? b. 5% annual interest compounded annually? c. 5% annual interest compounded weekly? d. 5% annual interest compounded daily? e. 5% annual interest compounded 1,000 times per year? f. 5% annual interest compounded 100,000 times per year? g. 5% annual interest compounded 100,000,000 times per year?
10. Use the rule of 70 to estimate how long it will take money to double with the interest rates listed below: a. 5% b. 10%
c. 14% d. 8.9%
e. 11% f. 3%
11. Compute the following information about doubling time (use the formula, not the rule of 70).
Math 95 – Homework Unit 1 – Page 28
a. How long does it take your money to double if you invest at 6% annual interest compounded monthly?
b. If you start with $10,000, and put it in the account in part (a) for the time you discovered, how much will the account have in it?
c. Now take the same $10,000 and put it in the account in part (a), but this time for half the time you found in (a). Are you halfway to doubling your money?
d. Repeat parts (a) through (c) using 3% annual interest compounded monthly. e. Repeat parts (a) through (c) using 12% annual interest compounded daily. f. Repeat parts (a) through (c) using 7.85% annual interest compounded weekly.
12. There is a famous problem about a biology lab that has a jar with bacteria in it. The number of bacteria
double every minute, and the jar will be full at 11:00 am. If it is 10:00 am now, how full is the jar at… a. 10:59 am? b. 10:58 am? c. How many jars are needed to keep all the bacteria at:
i. 11:00am ii. 11:01 am
iii. 11:04 am iv. 11:10 am.
13. Use the formula ipmt
iP
k
1log
1log
to see how long it would take to pay off the given debts.
a. How long would it take to pay off a student loan of $98,000 if you can only afford monthly payments of $350 and the interest rate is 4.89% annual interest compounded monthly?
b. How long would it take to pay off a mortgage of $484,000 if you can suddenly afford monthly payments of $2,900 and the interest rate is 4.73% annual interest compounded monthly?
c. How long would it take to pay off a credit card balance of $2,172 if you can only afford monthly payments of $75 and the interest rate is 18.99% annual interest compounded monthly?
d. How long would it take to pay off a credit card balance of $2,172 if you can only afford monthly payments of $75 and the interest rate is 4.99% annual interest compounded monthly?
Wrap-up and look back: 14. If the doubling time for a particular interest rate is 7 years, how long will it take $20,000 to become…
a. $40,000 b. $80,000
c. $160,000 d. $320,000
15. Why does half the doubling time not result in ending halfway to the doubled investment?
16. Write in words what you learned from this section. Did you have any questions remaining that weren’t
covered in class? Write them out and bring them back to class.
1.9: A Taxing Dilemma Vocabulary and symbols – write out what the following mean:
Adjusted Gross Income (AGI) Taxable Income (TI)
Tax Deductions
Math 95 – Homework Unit 1 – Page 29
Exemptions Withheld Tax Bracket
Tax Refund MFJ HoH
Concept questions: 1. With taxes, does the AGI come before or after the TI?
2. If you were in the 25% tax bracket, then a deduction of $10,000 would save how much in tax?
3. If you were in the 25% tax bracket, then a deduction of $1,000 would save how much in tax?
4. If you were in the 15% tax bracket, then a credit of $1,000 would save how much in tax?
5. If you were in the 25% tax bracket, then a deduction of $8,000 would be equivalent to how much of a
tax credit?
6. If someone is in the 25% tax bracket, does that mean they pay 25% tax on all their income?
7. Interpret what it means to be in the 28% tax bracket if you are filing as single? Is that different than if
you are filing as MFJ?
8. Luis and Luisa are trying to claim their daughter on their taxes for one more year. If they are in the 25%
tax bracket, how much will they save in taxes?
9. Matt and Mary are trying to claim their daughter on their taxes for one more year. If they are in the
15% tax bracket, how much will they save in taxes?
10. Richard and Rhee are trying to claim their daughter on their taxes for one more year. If they are in the
39.6% tax bracket, how much will they save in taxes?
Math 95 – Homework Unit 1 – Page 30
Exercises: Graduated tax system (IRS) based on 2015 tax code – METHOD 1 (Addition):
Individual Taxpayers (Single) If Taxable Income is Between The tax due is Plus this percent Of the amount over
0 and $9,225 0 10% 0 $9,226 and $37,450 $922.50 15% $9,225 $37,451 and $90,750 $5,156.25 25% $37,450 $90,751 and $189,300 $18,481.25 28% $90,750 $189,301 and $411,500 $46,075.25 33% $189,300 $411,501 and $413,200 $119,401.25 35% $411,500
$413,201 and above $119,996.25 39.6% $413,200
Married Filing Jointly (MFJ) If Taxable Income is Between The tax due is Plus this percent Of the amount over
0 and $18,450 0 10% 0 $18,451 and $74,900 $1,845 15% $18,450 $74,901 and $151,200 $10,312.50 25% $74,900 $151,201 and $230,450 $29,387.50 28% $151,200 $230,451 and $411,500 $51,577.50 33% $230,450 $411,501 and $464,850 $111,324.00 35% $411,500
$464,851 and above $129,996.50 39.6% $464,850
Head of Household (HoH) If Taxable Income is Between The tax due is Plus this percent Of the amount over
0 and $13,150 0 10% 0 $13,151 and $50,200 $1,315.00 15% $13,150 $50,201 and $129,600 $6,872.50 25% $50,200 $129,601 and $209,850 $26,772.50 28% $129,600 $209,851 and $411,500 $49,192.50 33% $209,850 $411,501 and $439,000 $115,737.00 35% $411,500
$439,001 and above $125,362.00 39.6% $439,000 We will not include Married Filing Separately for space reasons only. Deductions/exemptions are below: Single MFJ HoH Standard Deduction $6,300 $12,600 $9,250 Exemptions $4,000 per exemption
Math 95 – Homework Unit 1 – Page 31
Graduated tax system (IRS) based on 2015 tax code – METHOD 2 (Subtraction): NOTE: This table is used for taxable income over $100,000 – lower amounts are done with a tax table.
Individual Taxpayers (Single) If Taxable Income (TI) is Take TI Times this percent Then subtract this
At least $100,000 but not over $189,300 28% $6,928.75 Over $189,300 but not over $411,500 33% $16,393.75 Over $411,500 but not over $413,200 35% $24,623.75
Over $413,200 39.6% $43,630.95
Married Filing Jointly (MFJ) If Taxable Income (TI) is Take TI Times this percent Then subtract this
At least $100,000 but not over $151,200 25% $8,412.50 Over $151,200 but not over $230,450 28% $12,948.50 Over $230,450 but not over $411,500 33% $24,471.00 Over $411,500 but not over $464,850 35% $32,701.00
Over $464,850 39.6% $54,084.10
Head of Household (HoH) If Taxable Income (TI) is Take TI Times this percent Then subtract this
At least $100,000 but not over $129,600 25% $5,677.50 Over $129,600 but not over $209,850 28% $9,565.50 Over $209,850 but not over $411,500 33% $20,058.00 Over $411,500 but not over $439,000 35% $28,288.00
Over $439,000 39.6% $48,482.00
11. Use whichever table you prefer to calculate the tax owed on a taxable income of $430,000 if you file… a. Single b. MFJ c. HoH
12. Use whichever table you prefer to calculate the tax owed on a taxable income of $230,000 if you file… a. Single b. MFJ c. HoH
13. Use whichever table you prefer to calculate the tax owed on a taxable income of $150,000 if you file… a. Single b. MFJ c. HoH
14. Use whichever table you prefer to calculate the tax owed on a taxable income of $58,000 if you file… a. Single b. MFJ c. HoH
15. Scenario: Ivana Trump has income of $48,600 and will file as single. She took a new job and had moving expenses of $780 which is put in as an income adjustment (before AGI). She also finished up her school and has some education expenses so that she could take either $4,000 as a tuition/fees deduction or $2,000 as an education tax credit. She had $9,336 withheld from her paychecks for taxes. a. Consider the deduction scenario and run through the tax scenario. How much tax will she pay in
this scenario? Does she get a refund; if so, how much? b. Consider the tax credit scenario and run through the tax scenario. Remember that credits are
removed from taxes after the tax is calculated. How much tax will she pay with this scenario? Will she get a refund? If so, how much?
c. Which option is better for Ivana – tax deduction for school, or education tax credit? d. Determine the ratio of tax paid to gross income for the best option for Ivana, and turn into a
percentage. Is this the same percentage as the tax bracket she was in? Explain.
Math 95 – Homework Unit 1 – Page 32
16. Scenario: Shawna has income of $78,600 and will file as MFJ with her husband. He is unemployed and
going to school, and has some education expenses so that they could take either $4,000 as a tuition/fees deduction or $2,000 as an education tax credit. They have 2 kids and each qualifies for a $1,000 child tax credit. She had $8,521 withheld from her paychecks for taxes. a. Consider the deduction scenario and run through the tax scenario. Remember, deductions are
subtracted prior to AGI. How much tax will they pay with this scenario? Will they get a refund? If so, how much?
b. Consider the tax credit scenario and run through the tax scenario. Remember that credits are removed from taxes after the tax is calculated. How much tax will they pay with this scenario? Will they get a refund? If so, how much?
c. Which option is better for Shawna’s family – tax deduction for school, or tax credit? d. Determine the ratio of tax paid to gross income for the best option for Shawna’s family, and turn
into a percentage. Is this the same percentage as the tax bracket she was in? Explain. 17. Ben Higgins is filling out his taxes for 2015. He has income of $83,500 and is deciding whether or not
to get married during 2015. If so, he can claim MFJ status instead of single. His fiancée, Amanda, has income of $45,300 and does have 2 kids (each qualifying for the $1,000 child credit). Both will take the standard deduction either way. The total amount withheld for federal taxes was $13,563 for him and $1,812 for her.
a. Consider Ben filing as single and not getting married in 2015. How much tax will he pay with this
scenario? Will he get a refund? If so, how much? b. Consider Amanda filing as HoH and not getting married in 2015. How much tax will she pay with
this scenario? Will she get a refund? If so, how much? c. Consider the two getting married at the end of 2015 and filing as MFJ. How much tax will they pay
with this scenario? Will they get a refund? If so, how much? d. Which option is better – marriage or not? Explain. e. Would you consider this a marriage bonus or a marriage penalty? Why?
18. Rob Stark is filling out his taxes for 2015. He has income of $83,500 and is deciding whether or not to
get married during 2015. If so, he can claim MFJ status instead of single. His fiancée, Talisa, has income of $95,300. Both will take the standard deduction either way. The total amount withheld for federal taxes was $10,563 for him and $11,812 for her.
a. Consider Rob filing as single and not getting married in 2015. How much tax will he pay with this
scenario? Will he get a refund? If so, how much? b. Consider Talisa filing as HoH and not getting married in 2015. How much tax will she pay with this
scenario? Will she get a refund? If so, how much? c. Consider the two getting married at the end of 2015 and filing as MFJ. How much tax will they pay
with this scenario? Will they get a refund? If so, how much? d. Which option is better – marriage or not? Explain. e. Would you consider this a marriage bonus or a marriage penalty? Why?
Wrap-up and look back: 19. Where else can someone making less than $100,000 in taxable income go to find their tax? 20. Describe the situation called “marriage bonus.”
Math 95 – Homework Unit 1 – Page 33
21. Describe the situation called “marriage penalty.” 22. When both people who are married earn about the same amount of money, is this an opportunity for a
marriage bonus or a marriage penalty? Explain. 23. When one person who is married earns significantly more than the other, is this an opportunity for a
marriage bonus or a marriage penalty? Explain. 24. Write in words what you learned from this section. Did you have any questions remaining that weren’t
covered in class? Write them out and bring them back to class.
1.10: Wrap-up and Review 1. In this list of formulas, can you see where to use each?
3.1: trPI and trPFV 1
3.2: ntiPFV 1
3.3:
i
ipmtFV
nt 11
3.4: i
ipmtiP
ntnt 11
1
3.5: i
ipmtiPUB
kk 11
1
3.6: i
ipmtiP
ntnt 11
1
3.7:
cr
r
c
pmtP
t
1
11
3.8: b
axxaba b
x
log
loglog
3.9: ipmt
iP
k
1log
1log
2. Which type of account earns interest based on the principal investment only? 3. Find the amount of simple interest from the following:
a. A loan of $13,200 at 8.25% annual simple interest for 5 years. b. A loan of $35,200 at 7.25% annual simple interest for 15 months. c. An investment of $7,900 at 9.25% monthly simple interest for 15 years. d. An investment of $900 at 6.25% monthly simple interest for 15 months. e. An investment of $1,350 at 5.25% annual simple interest for 15 days.
4. Solve these simple interest problems for the missing piece.
a. Find the annual simple interest rate for a loan of 48 months with $2,350 interest on principal of $32,000.
b. Find the principal needed to earn $2,711 in interest on 5% monthly simple interest over 6 years. c. Find the principal needed to earn $397 in interest on 4.3% annual simple interest over 45 days. d. Find the time needed to earn $700 in interest on an investment of $900 at 4.2% annual simple
interest. 5. What is the future value of …
a. $3,950 at 3% annual simple interest for 13 months? b. $12,950 at 11.25% annual simple interest for 13 years?
Math 95 – Homework Unit 1 – Page 34
6. Determine the present value that will yield a future value of $39,400 at 6.25% annual simple interest for 2 years.
7. Determine the monthly payment and total interest paid for an add-on interest loans on a principal amount of $58,000 at 3.75% annual simple interest for 7 years.
8. Determine the finance charge for the credit card based on an ADB of $1,386 at 24.99% annual simple interest over June.
9. Determine (i) the finance charge, (ii) the new balance, and (iii) the minimum payment amount. Assume the credit card requires 3% rounded up to nearest $5. a. Peter has a credit card with an ADB of $6,694.78, with a remaining balance of $6,753.91. His
interest rate is 17.99% simple interest over December. b. Ophelia has a credit card with an ADB of $1,984.28, with a remaining balance of $1,190.25. Her
interest rate is 12.99% simple interest over March. 10. Find the future value of $40,000 at 7% annual interest compounded monthly after: (a) 6 months, (b) 15
years, and (c) 30 years. Compare each with the value using 7% annual simple interest. Round to the nearest penny at the end of the computations.
11. Determine the future value of $29,000 at 2.99% annual interest compounded weekly for 10 years, and determine the amount of interest earned.
12. Determine the present value of $29,000 at 5% annual interest compounded daily for 13 years, and determine the amount of interest earned.
13. Assume prices are rising at 7.92% each year. If the current cost of a car is $23,000, what will the price of the car be in 25 years?
14. Determine which table would you use for the following problem? Then use the appropriate table to determine the value. a. If you invest $6,500 each year in an account earning 6% annual interest compounded annually, how
much would you have in 13 years? b. If you invest $6,500 in an account earning 9% annual interest compounded annually, how much
would you have in 13 years? 15. Invest with Annuities a few more times.
a. If you invest $5,500 each year for a Roth IRA, and you do this for 26 years, how much will be in the account if it earns 6.25% annual interest compounded annually. Figure out how much you paid in and how much interest was earned.
b. If you invested $5,500 from age 30 to age 50, then invested $6,500 from age 50 to age 67, determine how much money you would have in the account. Assume 6.25% annual interest compounded annually. Determine how much you paid in and the amount of interest.
16. Work some annuities backwards – find the payment. a. How much money do you need to invest each month at 5.75% annual interest compounded monthly
for 18 years to end with $48,000 (for your baby’s education)? Determine how much interest is earned.
b. Because of extraordinary circumstances, your friend is now 55 years old and hasn’t started saving for retirement yet. She wants to have $200,000 when she retires at age 70. How much should she invest each month at 6.5% annual interest compounded monthly? Determine how much interest she will earn.
Math 95 – Homework Unit 1 – Page 35
17. Use the formula to find the monthly payment and the amount of interest paid. a. A mortgage of $325,000 at 4.15% annual interest compounded monthly for 30 years. b. A student loan of $69,600 at 4.29% annual interest compounded monthly for 10 years.
18. Use the formula to determine the missing piece that will match the information given. a. You can afford $287 per month for a car; determine how much of a loan amount you can afford for
4 years at 4.25% annual interest compounded monthly. Round loan amount down to the nearest dollar.
b. If the car loan has a balance of $7,920 and the interest rate is 5.75% annual interest compounded monthly, what is the amount needed to be paid each month to have this paid off in 3 years?
c. A credit card has a balance of $4,215 and your friend wants to pay it off over 3 years. The interest rate is 16.49% annual interest compounded monthly – what monthly payment is needed?
19. True/False – explain your answer if you choose ‘False’: a. Add-on interest loans charge interest on the principal only. b. Amortized loans charge interest on the remaining balance. c. Add-on interest loans have equal monthly payments. d. The total interest paid on amortized loans is calculated with trPI . e. The monthly interest paid on amortized loans is calculated with trPI . f. Paying extra on amortized loans will save you time. g. Paying extra on amortized loans will save you money. h. Paying extra on add-on interest loans will save you time. i. Paying extra on add-on interest loans will save you money.
20. Determine (i) the monthly P & I payment, (ii) the amount of interest paid in the first month, and (iii) the
amount of the P & I payment that goes to pay off the remaining balance.
a. A mortgage for $625,000 at 3.45% annual interest compounded monthly for 30 years. b. A car loan for $11,900 at 7.25% annual interest compounded monthly for 3 years.
21. Jackie is considering two mortgages on her loan amount of $373,500. The first is a 30 year mortgage at
4.45% annual interest compounded monthly and the second is a 15 year mortgage at 3.89% annual
interest compounded monthly. Compare these options and determine which is best for her:
a. She takes the 30 year option and makes the 30 year P & I payment for 30 years. b. She takes the 15 year option and makes the 15 year P & I payment for 15 years.
c. She takes the 30 year option and makes the 15 year P & I payment until paid off.
22. Consider the problem above with Jackie – she takes the 30 year loan and makes payments of $3,700 for 4 years. Approximate her unpaid balance.
Math 95 – Homework Unit 1 – Page 36
23. Mitchell knows that he needs $4,300 per month to live comfortably now. He plans to retire in about 31 years and plans to be retired for about 24 years after that. Determine… a. how much he needs each month to maintain his current standard of living when he retires 31 years
from now (assuming 2.8% inflation). b. how much he needs to have in his retirement account to be paid out equal monthly amounts of the
amount in (a) each month for 24 years if the account earns 5.4% annual interest compounded monthly.
c. how much he needs to invest each month at 8.25% annual interest compounded monthly over the next 31 years in order to have the amount in (b).
d. how much interest he earned over the course of the 55 years. 24. Peeta knows that he needs $4,300 per month to live comfortably now. He plans to retire in about 31
years and plans to be retired for about 24 years after that. Determine… a. how much he needs each month to maintain his current standard of living when he retires 31 years
from now (assuming 2.8% inflation). b. how much he needs to have in his retirement account to be paid out using a COLA payout annuity
with annual payments equivalent to the amount from (a) multiplied by 12. He wants payments to increase by 2.8% each year for 24 years if the account earns 5.4% annual interest compounded monthly.
c. how much he needs to invest each month at 8.25% annual interest compounded monthly over the next 31 years in order to have the amount in (b).
d. how much interest he earned over the course of the 55 years. e. Compare this COLA option with the fixed payment option.
25. If the first payment from a COLA payout annuity is $49,000, and the COLA is 3.1%, determine…
a. The amount of the 2nd payment. b. The amount of the 10th payment.
c. The amount of the 24th payment. d. The amount of the 31st payment.
26. In order to determine the total amount paid out from a COLA payout annuity, we can use a formula
we’ve seen before:
i
ipmtFV
nt 11 . When using this formula, the pmt is the first payment made
and the periodic rate is computed using the COLA rate, not the interest rate. The future value will be
the sum of all the payments! Determine the amount paid out of these COLA payout annuities:
a. First payment of $69,500 with cost of living as 2.7% and interest of 4.75% annual interest compounded annually, over 20 years.
b. First payment of $163,500 with cost of living as 3.1% and interest of 6.75% annual interest compounded annually, over 13 years.
c. First payment of $163,500 with cost of living as 3.1% and interest of 2.75% annual interest compounded annually, over 13 years.
Math 95 – Homework Unit 1 – Page 37
27. Solve the following equations using your calculator. If the answer is not exact, round to 4 decimal places. Be sure to check your work with each one.
a. 2437 n
b. 12,0000525.1100,1 n
c. 3.210325.1 n
d. 48.06 n
28. Determine how long it would take for the present value to become the future value.
a. How long until $50,000 becomes $120,000 at 4.5% annual interest compounded monthly? b. How long to turn $5,400 into $25,000 if the rate is 6.5% annual interest compounded monthly?
29. Use the formula ipmt
iP
k
1log
1log
to see how long it would take to pay off the given debts.
a. How long would it take to pay off a student loan of $28,000 if you can afford monthly payments of $210 and the interest rate is 4.89% annual interest compounded monthly?
b. How long would it take to pay off a mortgage of $311,000 if you can suddenly afford monthly payments of $2,900 and the interest rate is 3.23% annual interest compounded monthly?
30. Jon Snow is filling out his taxes for 2015. He has income of $55,500 and is deciding whether or not to get married during 2015. If so, he can claim MFJ status instead of single. His fiancée, Ygritte, has income of $85,300 and has 1 child. She can claim the child tax credit of $1,000 for her child. Both will take the standard deduction either way. The total amount withheld for federal taxes was $8,563 for him and $9,112 for her. a. Consider Jon filing as single and not getting married in 2015. How much tax will he pay with this
scenario? Will he get a refund? If so, how much? b. Consider Ygritte filing as HoH and not getting married in 2015. How much tax will she pay with
this scenario? Will she get a refund? If so, how much? c. Consider the two getting married at the end of 2015 and filing as MFJ. How much tax will they pay
with this scenario? Will they get a refund? If so, how much? d. Which option is better – marriage or not? Explain. e. Would you consider this a marriage bonus or a marriage penalty? Why?