The Solution to This Problem Requires Time Value of Money

question 142

Multiple Choice

The solution to this problem requires time value of money calculations.Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.
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Cory and Ginger want to buy an airplane.They find one that will cost $200,000.They must pay 10% down and can get the balance financed with a ten year loan at 7% interest and annual payments.What is their annual payment?

• A)$26,826
• B)$25,626
• C)$24,457
• D)$19,260

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Definitions:

Call

An options contract that gives the investor the right, but not the obligation, to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.

Put

A financial derivative option that gives the holder the right, but not the obligation, to sell a security at a specified price within a specified time.

Black-Scholes Option

A mathematical model used to calculate the theoretical price of European put and call options, not accounting for dividends.

Continuous Compounding

The mathematical limit that compound interest can reach if it’s computed and added to the principal balance continuously, leading to exponential growth.