. Suppose I am proposing you a project that generates 100 dollars in 3 years and cost 90 dollars today. What is the return of the project? What is the net return of the project? What is the rate of return of the project?

4. Suppose the interest rate between today and next year is r 01=3%, the interest rate between next year and the year after is r1,2 =3.5%. What is the annualize interest rate? What is the spot rate? What is the forward rate?

C. (35 points) Present value exercise:

Consider an economy with 10 periods: t=0,1,2,3,4,5,6,7,8,9,10. Let the interest rate be 10%.

Suppose I am giving you $150 today. What is the future value of the $150 tomorrow?

Suppose I am giving you $150 tomorrow. What is the present value of $150 received tomorrow? Which one do you prefer? Why?

What is the present value of $150 received at t=6?

What is the value of time 3 of the $150 received at time t=8?

What is the value at time t=10 of $150 received at time t=4?

Suppose I propose you a project that gives you $100 at t=1 and $150 at t=2, what is the present value of the project?

Suppose I propose you a project that gives you $150 starting at t=2 forever, what is the present value of the project?

What is the present value of a project that gives you $100 at time t=1 and $150 forever starting at t=2?

Suppose that the interest rate jumps at 12% from time t=5 to t=10, i.e. the interest rate is given by 10% at time t=0,1,2,3,4 and jumps to 12% from t=5 on, what is the total holding return or compound interest rate from t=0 to 4? What is the total holding return or compound interest rate from t=0 to t=10? What is the annualized return in both cases?