4) Find IRR for following cash flows:

0_____1_____2_____3_____4

($100) $10 $10 $10 $110

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

Show spreadsheet printout

b) use intuition: if initial cashflow is changed to (90) the IRR will be Higher/lower because _________________________________

Hint: Consider the impact of a higher discount rate on the PV of a given set of cash flows.

5) The Stated rate i=10% per year compounded semi-annually. The Effective annual rate is __________%

a) use built-in calculator/Excel functions

b) use formula

6) Term structure:

Two year rate is i=5% per year

Three year rate is i=6% per year

Find the implied forward rate for the third year. i=_____%

7) Real rate, r = 5% inflation rate, P = 2%

a) Find the nominal rate (i) using approximate method, i.e. i = r+P i =______%

b) Find the nominal rate (i) using the exact method,

i.e. 1+ i = (1+r)*(1+P) i =_____%

8) Do problem 9 using r = 5% and P = 100%

a) i =_____% approximately

b) i =_____% using the exact method.

Note: Compare a and b in problems 8 and 9. The approximation is reasonable only when the rates are small.