Question 2

Hounslow Youth (HY), a charity organization, would like to create a scholarship fund that will give the local college 50,000 in every two years. However, it turns out that the maintenance of the scholarship fund (banking fees, etc.) will cost the college 1,000 every year. HY plans to make the first payment as soon as possible and the maintenance fees will be paid at the year-ends. The interest rate is 6% APR with annual compounding.

1. What is the Effective Semi-annual Rate? [5 points]
2. What is the Net Present Value of the scholarship fund to the local college? [12 points]
3. Given the following term structure of interest rates (denoted as EAR), what would be the value as of Year 3 of the HYs second scholarship payment? [8 points]

1-year: 4.00%

2-year: 4.50%

3-year: 5.70%

4-year: 6.20%