HWK 2
Ch 5
Suggested Solution Guide.
23.
Here we need to find the interest rate that equates the perpetuity cash flows with the PV of
the cash flows. Using the PV of a perpetuity equation:
PV =
C
/
r
$175,000 = $3,000 /
r
We can now solve for the interest rate as follows:
r
= $3,000 / $175,000
r
= .0171 or 1.71% per month
The interest rate is 1.71% per month. To find the APR, we multiply this rate by the number
of months in a year, so:
APR = (12)1.71%
APR = 20.57%
And using the equation to find the EAR, we find:
EAR = [1 + (APR /
m
)]
m
– 1
EAR = [1 + .0171]
12
– 1
EAR = .2263 or 22.63%
32.
We will calculate the time we must wait if we deposit in the bank that pays simple interest.
The interest amount we will receive each year in this bank will be:
Interest = $83,000 (.05)
Interest = $4,150 per year
The deposit will have to increase by the difference between the amount we need by the
amount we originally deposit with divided by the interest earned per year, so the number of
years it will take in the bank that pays simple interest is:
Years to wait = ($150,000 – 83,000) / $4,150
Years to wait = 16.14 years
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 Spring '08
 sabrizo
 Finance, Time Value Of Money, Interest, Interest Rate, Perpetuity

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