In three years you will pay the first of eight annual $100 payments. The current interest rate is 14%, but after 5 years (by t5) the rate will have dropped to 8%. What is the total value of your payments at the end of 10 years? Sol. $1,092 Your brother-in-law borrowed $1,000 from you 10 years ago and then disappeared. Yesterday he returned and expressed a desire to pay back the loan, including the accrued interest. Assuming that you had agreed to charge him 7%, and assuming that he wants to make five equal payments beginning in one year, how much would your brother-in-law have to pay you annually in order to retire the debt? (Assume that the loan continues to accrue interest at 7% per year). Sol. $480 7. Suppose you pay $403 per year for eight years (at year end) into a fund that promises to pay you $400 per year in perpetuity thereafter. At what interest rate is, this a fair deal? Sol. 9%