MATH 265 Problem Set 2 Due 19 February 2020 1. A person wins the lottery for $3,000,000 and can choose between a full payout now or a 20 year annuity consisting of equal payments of $200,000 per annum, the first payment being made now. The prevailing 20 year interest rate is 3%. Which option should be chosen? Show the rationale behind your answer. (30 points) 2. Find the value of $100 s _ (10 points) 76.2 3. For the data given below find the time weighted yield and the dollar weighed yield (30 points) BALANCE DATE Jan 1 TRANSACTION +100,000 100,000 -2,000 81,500 Feb 1 Nov 1 Dec 31 +12,000 95,202 105,782 4. Given the following rates, what is the 2 year rate 1 year forward? (10 points) TENOR (YEARS) RATE (ANNUAL) 5% 5% N 3% w 5. A perpetuity that begins in 2 years will pay a coupon $10/year and is scheduled to be priced at $200. What is the current value of the instrument if the 2 year interest rate is 7%? What is the interest rate of the perpetuity? (20 points)