Reference no: EM133176059

Questions -

Q1. A security pays an annual cash flow of $1.2 forever. The appropriate discount rate is 7% per year. (Assume the first cash flow is paid one year from now.) What is the present value of all future cash flows?

Q2. You want to buy a house financed with a 15-year fixed-rate mortgage. The best interest rate you could find is 14% APR. Payments are made monthly, so the APR should be assumed to be a simple interest rate (i.e. the wrong thing) compounded monthly with no other adjustments. What is the most you can borrow if you can only afford to pay $1,400 per month?

Q3. You've bought an inflation-adjusted annuity to give you a constant real income during your retirement years. The annuity will make 20 annual payments. The first payment of $80,000 will occur one year from now, and annual payments will increase at the rate of inflation, 2%, for 19 years and then stop. The interest rate is 8%. What is the present value of these cash flows?

Q4. Your local loan shark offers weekly payday loans: You can borrow $1,000 and pay back $1,040 one week later. What is the AIR (the simple rate) on the loan? (Assume that there are exactly 52 weeks in a year.)

Q5. A security pays $800 every 8 years forever. The appropriate discount rate is 9% (EAR). What is the value of the security if the first payment occurs 5 years from now?