Question
1. Perpetuity If an investment policy pays you $25,000 per year forever and you require 6% p.a. return on this investment, how much will you
1. Perpetuity
If an investment policy pays you $25,000 per year forever and you require 6% p.a. return on this investment, how much will you pay for this policy? What about a policy that pays $30,000 per year?
2. EAR
Calculate the EAR in the following cases:
APR | compounding | EAR |
10% | Quarterly | |
17% | Monthly | |
13% | Daily | |
9% | Semi-annually |
Hint:Use the EFFECT function in Excel.
3. APR
Find the APR for each of the following cases:
APR | compounding | EAR |
Semi-annually | 14.00% | |
Monthly | 9.00% | |
Weekly | 8.00% | |
Daily | 13.00% |
Hint:Use the NOMINAL function in Excel.
4. Present Values
Calculate the present values for the two following cash flows:
Discount Rate | Discount Rate | ||
7.30% | 9.20% | ||
Year | Cash Flow from A | Cash Flow from B | |
1 | $1,200 | $1,400 | |
2 | 1,100 | 1,900 | |
3 | 800 | 3400 | |
4 | 600 | 4300 |
5. Annuity and Perpetuity
You are going to receive a 30-year annuity of $105,000. Your friend, Nancy, is going to receive a perpetuity of $105,000. If the appropriate interest rate is 7% p.a., how much more is Nancy's cash flow worth than yours?
6. Comparing Cash Flows
You've just joined a new firm. They offered you two different salary arrangements:
A. $6,100 per month for the next two years.
B. $4,800 per month for the next two years, plus a $25,000 signing bonus.
If the interest rate is 7% p.a., which arrangement do you prefer?
7. Future Values
Assuming an interest rate of 6.9% p.a., what is the future value of the following cash flows five years from now? What is the future value 10 years from now?
Year to find value | 10 |
Interest rate | 6.9% |
Year | Cash flow |
2 | $ 15,000 |
3 | 24,000 |
5 | 33,000 |
8. Future Values
An insurance company is offering a new policy. The parent makes the following six payments to the insurance company, and no more payments after child's sixth birthday. When the child reaches age 65, he/she receives $350,000. If the interest rate is 10% for the first 6 years, and 7% for all subsequent years, is the policy worth buying?
Year | Payment |
1 | $ 800 |
2 | $ 800 |
3 | $ 900 |
4 | $ 900 |
5 | $ 1,000 |
6 | $ 1,000 |
# of years until retirement | 65 |
Payout at retirement | $ 350,000 |
Interest rate 1 | 10% |
# of years | 6 |
Interest rate 2 | 7% |
# of years | 59 |
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