Assignment Questions
Week 6 Debt
- Sally’s going to buy a used car for $5,000. She has enough money saved so that she could use cash to pay for it, or she could borrow and make payments over the next three years. Answer the following questions.
- How much would her $5,000 earn over the next three years if she invested it at 4% simple interest? Please show calculations.
- How much in total would she pay for the car if she made payments that included interest of 5% simple interest? Please show calculations.
- Given the calculations above, would you recommend that Sally finance her car or pay for it and invest the 5,000 for the next year? Why?
- Tech Marketing Inc. is an online and social marketing consulting firm that started in Michael David’s garage. The company now has 10 employees that must work in shifts due to the small space. Michael has decided to accept $210,000 from the investor for 50% ownership in his company and use it to grow Tech Marketing into a national consulting firm. However, during the next two years he plans to spend only $10,000 and invest the remaining $200,000 for two years at 6% interest rate compounded monthly.
- How much cash will the company have at the end of two years? (You can use the compound interest calculator at
How much of that will be interest income?
- How much interest would Tech Marketing earn if it invested the $200,000 at 6% simple interest? Please show calculations.
- How much more interest income did the compound interest option earn? Please show calculations.
- Assume Michael, representing Tech Marketing, went to the bank to obtain a mortgage. The bank will present an interest rate that reflects their perception of the kind of credit risk Tech Marketing would present. (See the graph from your lecture). What four questions do you think they may ask Michael to estimate how risky this loan may be? You may also include a question or two that may reflect information from the financial analysis module.
(NOTE: This question is meant for you to reflect your understanding of how a bank may assess risk. There are no specific answers expected here, but the questions to need to reflect your understanding of the material.)