Reference no: EM132499491
1. What is the name for an infinite stream of constant payments occurring at regular time intervals?
- Annuity
- Perpetuity
- Regularity
- Equivalence
2. At what point in the timeline do the annuity and perpetuity equations value an annuity or perpetuity?
Whatever, you know, just stick it in wherever
At the time of the first cash flow
What is truth. We are all just dust in the wind.
One compounding period before the first cash flow.
3. A security pays pays an annual cash flow of $1.1 forever. The appropriate discount rate is 8% per year. (Assume the first cash flow is paid one year from now.) What is the present value of all future cash flows?
4. You want to buy a house financed with a 30-year fixed-rate mortgage. The best monthly interest rate you could find is 1.1%. What is the most you can borrow if you can only afford to pay $1,300 per month?
5. 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, 4%, for 19 years and then stop. The interest rate is 5%. What is the present value of these cash flows?
6. Your local loan shark offers weekly payday loans: You can borrow $1,000 and pay back $1,050 one week later (or lose a finger or two). What is the APR (the simple rate) on the loan? (Assume that there are exactly 52 weeks in a year, and remember to state the result in "decimal" form, not as a percent.).What is the effective annual rate on the loan? Again assume that there are exactly 52 weeks in the year, and state the rate in decimal form.
7. A security pays $800 every 7 years forever. The appropriate discount rate is 4% (EAR).
WARNING: You can't solve this just by plugging numbers into your calculator. The cash flows aren't annual, and the first one doesn't necessarily occur one period from now! You have to map it out! What is the value of the security if the first payment occurs 5 years from now?
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