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Unformatted text preview:  1  AFX3355 Property Investment Tutorial 4 Solution guidelines Tutorial 4 GM Chapter 8: Qs 8.10 8.17, 8.21, 8.23, 8.25, 8.33 8.38, 8.46 8.55 Q 8.10 What is the future value of $25,000 that grows at a nominal interest rate of 11% per year, compounded monthly, for two years? r = 11%/12 = 0.91667% n = 2(12) = 24 months FV = $25,000(1.0091667)24 = $31,120.71 Q 8.11 What is the effective annual rate (EAR) of 8% nominal annual rate compounded monthly? 12 0.08 1 1 0.083 12 EAR = + = (8.3%) Q 8.12 What is the effective annual rate (EAR) of 6.5% nominal annual rate compounded monthly? 12 0.065 1 1 0.06697 12 EAR = + = (6.697%) Q 8.13 What is the effective annual rate (EAR) of 8% nominal annual rate compounded semiannually? 2 0.08 1 1 0.0816 2 EAR = + = (8.16%) Q 8.14 What is the effective annual rate (EAR) of 6.5% nominal annual rate compounded semiannually? 2 0.065 1 1 0.066056 2 EAR = + = (6.6%) Q 8.15 If the bond equivalent rate is 10%, what is the corresponding mortgage equivalent rate? Bond coupon is paid twice each year. Mortgage is paid monthly. 1 + (0.10/2)] 2 1 = 0.1025 = 10.25% EAR [(1 + 0.1025) 1/12 1]12 = 0.097978 = 9.80% MER 2  Q 8.16 If the bond equivalent rate is 6%, what is the corresponding mortgage equivalent rate? Bond coupon is paid twice each year. Mortgage is paid monthly. [1 + (0.06/2)] 2 1 = 0.0609 = 6.09% EAR [(1 + 0.0609) 1/12 1]12 = 0.059263 = 5.93% MER Q 8.17 If the mortgage equivalent rate is 10%, what is the corresponding bond equivalent rate? MER rate [1 + (0.10/12)] 12 1 = 0.104713 = 10.4713% EAR 10.4713% EAR rate [(1 + 0.104713) 1/2 1]2 = 0.1021066 = 10.21% BER Q 8.21 If you invested $15,000 and received back $30,000 five years later, what annual interest (or growth) rate (compounded annually) would you have obtained? 1/5 $30,000 1 0.14869836 (14.87%) $15,000 = Q 8.23 In Question 8.21, what nominal annual rate compounded monthly would you have obtained? 1/5 $30,000 12 1 14.87% $15,000 = or ( ) 1/12 1.14869836 1 13.94% = Q 8.25 In Question 8.21, what continuously compounded rate would you have obtained? Continuous compounding: FV = P e rt $30,000 = $15,000 e r(5) $30,000 1 ln 0.138629 (13.86%) $15,000 5 r = = Q 8.33 A real estate investor feels that the cash flow from a property will enable her to pay a lender $15,000 per year, at the end of every year, for 10 years. How much should the lender be willing to loan her if he requires a 9% annual interest rate (annually compounded, assuming the first of the 10 equal payments arrives one year from the date the loan is disbursed)?...
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This note was uploaded on 05/18/2008 for the course AFX 3355 taught by Professor John during the Three '08 term at Monash.
 Three '08
 John

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