chapter4-quantosanalytics.docVIP

Chapter 4 The Time Value of Money 4-6. Consider the following alternatives: i. $100 received in one year ii. $200 received in five years iii. $300 received in ten years a. Rank the alternatives from most valuable to least valuable if the interest rate is 10% per year. b. What is your ranking if the interest rate is only 5% per year? c. What is your ranking if the interest rate is 20% per year? a. Option ii Option iii Option i b. Option iii Option ii Option i c. Option i Option ii Option iii 4-7. Suppose you invest $1000 in an account paying 8% interest per year. a. What is the balance in the account after 3 years? How much of this balance corresponds to “interest on interest”? b. What is the balance in the account after 25 years? How much of this balance corresponds to interest on interest? a. The balance after 3 years is $1259.71; interest on interest is $19.71. b. The balance after 25 years is $6848.48; interest on interest is $3848.48. 4-13. You have a loan outstanding. It requires making three annual payments at the end of the next three years of $1000 each. Your bank has offered to allow you to skip making the next two payments in lieu of making one large payment at the end of the loan’s term in three years. If the interest rate on the loan is 5%, what final payment will the bank require you to make so that it is indifferent between the two forms of payment? Timeline: 0 1 2 3 1,000 1,000 1,000 First, calculate the present value of the cash flows: Once you know the present value of the cash flows, compute the future value (of this present value) at date 3. 4-14. You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now. a. What is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity? b. What is the NPV of the opportunity if the interest rate is 2% per year?