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C6-3 RFS's Present Values The following table gives the net cash inflows at each point in time associated with nine alternatives. For example, item 1 pays $83.96 immediately. Item 9 pays nothing immedi- ately, $100 one year hence, $50 two years hence, and $200 three years hence. Time Item 2 $83.96 $ 50.00 6.00 $40.00 6.00 $100.00 1.42 106.00 119.10 30.00 25.00 55.00 200.00 20.00 35.00 55.00 100.00 25.00 30.00 55.00 50.00 A NCIAL ACEUL applicable to HMS AND CASES TO ACCOWPAR We begin with a set of questions about items 1. 2. and. The interest rate applicable minem , unless specified otherwise, is annually. In providing your answers to the nearest 50.01 and expect some minor rounding errors * What is the present value of item I? What is the present value of item2! What is the present value of item ? Suppose you had item I and invested its balance in an investment that pays period Complete the following table: sys 6 Value at Time Value at Time 2 Value at Time Initial Investment S .96 Suppose a bank is willing to lend money at 6 ; that is, the bank is willing to extendre as long as it earns 6% on its investment. If you owned only item 2, how much could borrow from the bank at time of That is, how much would the bank loan you in exchan for a payment of $100 three years hence! 6. Suppose you own item and invest it immediately in a bank account that pays annually. Also, suppose you want to create the cash flow pattern of item 3. Compla the following table: Timeo Time 3 Balance Value Balance Withdrawal Forward Balance Withdrawal Forward Balance Withdral $81.95 $89.00 $50.00 $39.00 413 40 TL 141 2 Time 2 Time Balance In two sentences or less, describe what these calculations tell you about the concen of present values. f. The cash flows of item 4 are those of a $100 face value bond with a 6% coupon anda maturity of three periods. What is the present value of item 4? The cash flows of item 5 are those of a zero-coupon bond. What is the present value of item 5? From what you know from earlier calculations, if you had item 5. could you repli cate the cash flows of item 4 if you had access to a bank account that pays 6% interest? h. What is the present value of item 6? i. What is the present value of item 7? i. What is the present value of item 8? k. Notice that the present value of item 8 is equal to the present value of item 6 plus the present value of item 7. Why is this true? Complete the following table for item 9: Time 0 Time 1 Value before Value after Payment Payment Value Time 2 Value before Value after Payment Payment Time 3 Value before Payment m. Now suppose the interest rate changes unexpectedly to 8% the instant before time Complete the following table for item 9 values at times and I should be as in part (0) Time 0 Time 1 Value before Value Payment Value after Payment Time 2 Value before Value after Payment Payment Time 3 Value before Payment C6-3 RFS's Present Values The following table gives the net cash inflows at each point in time associated with nine alternatives. For example, item 1 pays $83.96 immediately. Item 9 pays nothing immedi- ately, $100 one year hence, $50 two years hence, and $200 three years hence. Time Item 2 $83.96 $ 50.00 6.00 $40.00 6.00 $100.00 1.42 106.00 119.10 30.00 25.00 55.00 200.00 20.00 35.00 55.00 100.00 25.00 30.00 55.00 50.00 A NCIAL ACEUL applicable to HMS AND CASES TO ACCOWPAR We begin with a set of questions about items 1. 2. and. The interest rate applicable minem , unless specified otherwise, is annually. In providing your answers to the nearest 50.01 and expect some minor rounding errors * What is the present value of item I? What is the present value of item2! What is the present value of item ? Suppose you had item I and invested its balance in an investment that pays period Complete the following table: sys 6 Value at Time Value at Time 2 Value at Time Initial Investment S .96 Suppose a bank is willing to lend money at 6 ; that is, the bank is willing to extendre as long as it earns 6% on its investment. If you owned only item 2, how much could borrow from the bank at time of That is, how much would the bank loan you in exchan for a payment of $100 three years hence! 6. Suppose you own item and invest it immediately in a bank account that pays annually. Also, suppose you want to create the cash flow pattern of item 3. Compla the following table: Timeo Time 3 Balance Value Balance Withdrawal Forward Balance Withdrawal Forward Balance Withdral $81.95 $89.00 $50.00 $39.00 413 40 TL 141 2 Time 2 Time Balance In two sentences or less, describe what these calculations tell you about the concen of present values. f. The cash flows of item 4 are those of a $100 face value bond with a 6% coupon anda maturity of three periods. What is the present value of item 4? The cash flows of item 5 are those of a zero-coupon bond. What is the present value of item 5? From what you know from earlier calculations, if you had item 5. could you repli cate the cash flows of item 4 if you had access to a bank account that pays 6% interest? h. What is the present value of item 6? i. What is the present value of item 7? i. What is the present value of item 8? k. Notice that the present value of item 8 is equal to the present value of item 6 plus the present value of item 7. Why is this true? Complete the following table for item 9: Time 0 Time 1 Value before Value after Payment Payment Value Time 2 Value before Value after Payment Payment Time 3 Value before Payment m. Now suppose the interest rate changes unexpectedly to 8% the instant before time Complete the following table for item 9 values at times and I should be as in part (0) Time 0 Time 1 Value before Value Payment Value after Payment Time 2 Value before Value after Payment Payment Time 3 Value before Payment