1. You receive a solicitation to buy a security for $4,000. This security pays a cash flow of $100 one year from now, with payments each subsequent year that grow at a constant rate g forever. Suppose the relevant interest rate is 6%. What is the minimum growth rate g such that you should buy this security?

2. Suppose I promise to pay you 5 payments as follows: $12,000 to be received 7 years from today, and 4 additional subsequent annual payments that grow at 4% per year thereafter. If the interest rate is 8.25%, what is this stream of cash flows worth to you today?

3. This problem asks you to confirm that a growing annuity has a well-defined and positive PV even when the growth rate of cash flows exceeds the discount rate (g > r). Returning to the Danish government security example, assume the Danish government decides to offer a security that will pay growing cash flows for a total of 30 years. The security will pay 200 Kroner in one year, and then amounts that grow at 6% per year thereafter, until the final payment 30 years from now. What is the value of this security if the discount rate equals 4%? Hint: Dont be perturbed if one term in your computation is negative, because the second term will also be negative, and the product therefore positive!

5. Compute the EAR associated with an APR of 10% under the following alternative interest compounding schemes: (a) quarterly (m = 4) (b) monthly (m = 12) (c) daily (m = 365) (d) continuous (m = )