Midterm01answers - 1 Answers to Quiz 03 1.1 Question 1 a P...

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1 Answers to Quiz 03 1.1 Question 1 a) PV 1 = 10 ; 000; PV 2 = 12000 (1 : 025) 5 = 10 ; 606 Option 2 gives higher present value. b) YES, due to time value of money, you e/ectively get a zero percent loan. 1.2 Question 2 a) First compute the EAR: EAR = (1 : 02) 4 1 = 8 : 24% To get to the APR with semiannual compounding, we have to solve for: 1 + EAR = (1 + APR= 2) 2 Solving for APR yields: APR = 2 p 1 + EAR 1 ± = 8 : 08% Other solution concept: If you get e/ectively 2% per quarter, then you must get (1 : 02) 2 1 for half a year. Let us call the E/ective semiannual rate ESR : ESR = (1 : 02) 2 1 = 4 : 04% Thus the APR (with semi-annual compounding) is simply: APR = 2 ESR = 8 : 08% b) You want lowest EAR on a loan: EAR semi = (1 : 03) 2 1 = 6 : 09% EAR quart = (1 : 015) 4 1 = 6 : 14% So go with semiannual. BTW, it is not necessary to compute the numbers to get full credit, if you realize that the same APR will always produce a higher 1

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EAR if the compounding frequency is higher. c)
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This note was uploaded on 10/02/2009 for the course UGBA 08547 taught by Professor Odean during the Spring '09 term at Berkeley.

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Midterm01answers - 1 Answers to Quiz 03 1.1 Question 1 a P...

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