FIN104 Tutorial Questions - Week 4
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FIN104 Tutorial Questions - Week 4
1. Future Values. You deposit $1,000 in your bank account. (CH5.Q5).
a. If the bank pays 4% simple interest, how much will you accumulate in your account after 10 years?
b. How much will you accumulate if the bank pays compound interest?
2. Present Values. What is the present value of the following cash-flow stream if the interest rate is 6%? (CH5.Q14).
Year |
Cash Flow |
1 |
$200 |
2 |
400 |
3 |
300 |
3. Annuities. Would you rather receive $1,000 a year for 10 years or $800 a year for 15 years if the interest rate is 5%? (CH5.Q21).
4. Perpetuities and Effective Interest Rate. What is the value of a perpetuity that pays $100 every 3 months forever? The interest rate quoted on an APR basis is 6%. (CH5.Q46)
5. Real versus Nominal Rates. You will receive $100 from a savings bond in 3 years. The nominal interest rate is 8%. (CH5.Q75)
a) What is the present value of the proceeds from the bond?
b) If the inflation rate over the next few years is expected to be 3%, what will the real value of the $100 payoff be in terms of today’s dollars?
c)What is the real interest rate?
d) Show that the real payoff from the bond [from part (b)] discounted at the real interest rate [from part (c)] gives the same present value for the bond as you found in part (a).
2022-05-31