Question
e. Calculate the present value of the following cash flow stream, discounted at 10%. I = 8% Time period 0 1 2 3 4 0
e. Calculate the present value of the following cash flow stream, discounted at 10%. I = 8% Time period 0 1 2 3 4 0 $100 500 500 -150
f. (1.) Define (a) the stated, or quoted, or nominal rate (iNom) and (b) the periodic rate (iPER). (2.) Will the future value be larger or smaller if we compound an initial amount more often than annually, for example, every 6 months, or semiannually, holding the stated interest rate constant? Why? (3.) What is the future value of $100 is invested in an account at an interest rate of 10% for 3 years,annual compounding? Semi annual compounding? Quarterly compounding? Monthly compounding? Daily Compounding?
g. (1.) What would the required payment be on a $1,000 loan that is to be repaid in three equal installments at the end of each of the next three years if the interest rate is 10%? Construct an amortization table for the loan described above. (2.) What is the annual interest expense for the borrower, and the annual interest income for the lender, during Year 2?
h.You are offered a note which pays $1,000 in 15 months (or 456 days) for $850. You have $850 which pays a 6.76649% nominal rate, with 365 daily compounding, which is a daily rate of .018538% and an EAR of 7%. You plan to leave the money in the bank if you do not buy the note. The note is riskless. Should you buy it? Use three ways to check the decision.
i.Jackson Central has a 6-year, 8% annual coupon bond with a $1,000 par value. Earls Enterprises has a 12-year, 8% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6%. If the market yield increases to 7%, which bond will you recommend to your client?
j.Assume the real rate of interest on 1-year, 10-year, and 30-year bonds is 3%. Also assume the rate of inflation is expected to be 3% for the coming year. Considering only an inflation premium, construct an example showing how an expected increase in the rate of inflation leads to an upward sloping term structure via the Fisher effect. Then, explain how the addition of interest rate risk will affect your results.
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