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Unformatted text preview: H6.1. Solution to Problem 6.10 6.10. Calculating Perpetuity Values: The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs €20,000 per year forever. If the required return on this investment is 10%, how much will you pay for the policy? This cash flow is a perpetuity. To find the PV of a perpetuity, we use the equation: PV = C / r = €20,000 / .10 = €200,000.00 H6.2. Solution to Problem 6.11 6.11. Calculating Perpetuity Values: In the previous problem, suppose the Perpetual Life Insurance told you the policy costs € 210,000. At what interest rate would this be a fair deal? 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 €210,000 = €20,000 / r We can now solve for the interest rate as follows: r = €20,000 / €210,000 = 9.52% H6.3. Solution to Problem 6.14 6.14. Calculating EAR: Xian City Bank charges 10.2% compounded monthly on its business Xian City Bank charges 10....
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This note was uploaded on 04/13/2010 for the course TECHNOLOGY 032913 taught by Professor Hong during the Spring '08 term at 서울대학교.
 Spring '08
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