1) Currency appreciation: Consider price of beer. Let's pretend that last year a bottle of beer used to cost one dollar, but this year it costs two dollars per bottle.

a) This means beer costs twice as much as last year; or beer price has gone up by ___________%

b) One dollar buys half as much beer as last year; or dollar has fallen in value by ___________%

Note: The same idea works for relative values of currencies, i.e. appreciation of Yen against the dollar or depreciation of dollar against the Yen.

2) Do problem 1 using different data. Last year a bottle of beer used to cost $ 0.50, but this year it costs $ 0.60.

a) Beer price has gone up by _________%

b) Dollar has fallen in value by _________%

3) Find PV for following cash flows using a discount rate of 10% per period, all periods are of the same (but unspecified) duration.

0_____1_____2_____3_____4

$10 $10 $10 $110

a) use calculator, make sure that you know the procedure.

N=____, PMT=_____, i=____, FV=_____,

PV=_____

b) use spreadsheet, make sure that you know the procedure

PV=________

c) use intuition: PV=_____because ____________________

Hint: Compare coupon rate and discount rate.

d) if we use a higher discount rate the PV will be higher/lower