quiz1 - A 3 . 10 (c) $2,700 (d) $3,000 3. Suppose that you...

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Econ 134a Summer 2007 Quiz 1 Name: 1. Consider a payment of $1 million in ten years. If the interest rate declines from 10% to 8%, what happens to the present value of that payment? (a) Increases - By the present value equation, as r increases, the denomi- nator increases and PV decreases. (b) Decreases (c) No change, since the payment has not changed (d) Not enough information 2. Given a discount rate of 10%, calculate the (approximate) present value of an annuity which pays $1,000 per year for 3 years, with the first payment due in exactly 1 year. (a) $2,250 (b) $2,500 - Use the annuity formula to solve 1000
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Unformatted text preview: A 3 . 10 (c) $2,700 (d) $3,000 3. Suppose that you can borrow and lend at 5%. You plan to spend $35,000 this year, and your employer is oering to restructure your salary to best t your needs. Which of the following options should you take? (a) $35,000 this year and $85,000 next year (b) $50,000 this year and $70,000 next year (c) $100,000 this year and $20,000 next year - Highest PV (d) Doesnt matter, since you can borrow and lend at the same rate Helpful formulae: Net Present Value = C + T t =1 C t (1+ r ) t Annuity: PV = C r 1-1 (1+ r ) t...
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