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a) On 1st June 2014, a company signs a contract that entitles the company to receive two future cash flows as follows: On 1st June
a) On 1st June 2014, a company signs a contract that entitles the company to receive two future cash flows as follows:
On 1st June 2018: $30,000
On 1st June 2021: $10,000
Assuming that the relevant interest rate is 5 percent per annum (effective), value this contract as at
i. 1st June 2014 (3 marks).
ii. 1st June 2018 and (3 marks).
b) If the inflation rate is expected to be 3% per annum and the real interest rate is 2% per annum, what is the nominal interest rate? (2 marks).
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