1.

a.Rates are currently 7% p.a. You wish to purchase a security that pays out $500 each 3 months starting in exactly 2 months time. The security will pay out a total of 30 payments. What is the fair purchase price of the security?

b.Assume that you purchased the above security. Imagine that exactly 1 year has passed. You now wish to sell the security. However, interest rates have now fallen to 6% p.a. compounded monthly. What is the fair selling price of the security?

2. You own a house on a plot of land. The land has a value of $150,000. Use of the house has value to you. You believe that the first years benefit to you amounts to $8000. Assume that this is as though you get $8000 at the end of the first year. Thereafter the annual benefits diminish at 4% per year. Furthermore, assume that the house will have to be demolished in exactly 22 years. Assume that rates are 8% p.a. Assume the land value remains unchanged over time.

a. What is the total value of the house and land? b. You enter into a contract to sell the house. The purchaser will take possession in exactly 6 years. The purchaser uses the same method of valuation as you have. However, you want payment today. What amount will the purchaser be willing to give you today?