solutionHW1 - . 08) 3 = 1 , 533 6. a. Nominal interest rate...

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ECONOMICS 389 – Solution #1 Spring 2010 1 COMPLETION QUESTION 1. Future Value 2. higher 3. present value 4. discount rate 5. lower 6. perpetuity 2 PROBLEMS 1. In each case, FV (200) = 200(1 + r ) t . So a. FV = 200(1 + 0 . 08) 10 = 431 . 785; b. FV = 200(1 + 0 . 08) 20 = 932 . 191; c. FV = 200(1 + 0 . 04) 10 = 296 . 049; d. FV = 200(1 + 0 . 04) 20 = 438 . 225. 2. In each case, PV (100) = 100 (1+ r ) t . So a. PV = 100 / (1 + 0 . 05) 5 = 78 . 353 b. PV = 100 / (1 + 0 . 05) 10 = 61 . 391 c. PV = 100 / (1 + 0 . 2) 5 = 40 . 188 d. PV = 100 / (1 + 0 . 2) 10 = 16 . 151 3. The deposit today equals the future value discounted back to the present or 100 , 000 / (1 + 0 . 05) 20 = 37 , 700. 1
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4. PV ( Matthew ) = 1 , 000[ 1 0 . 06 - 1 0 . 06(1 + 0 . 06) 10 ] = 7 , 360 PV ( Brother ) = 1 , 200[ 1 0 . 06 - 1 0 . 06(1 + 0 . 06) 7 ] = 6 , 698 Matthew will be better off. 5. PV = 500 (1 + 0 . 08) + 600 (1 + 0 . 08) 2 + 700 (1 + 0
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Unformatted text preview: . 08) 3 = 1 , 533 6. a. Nominal interest rate is the rate at which money invested grows. Nom-inal rates, adjusted for ination in a period, are real interest rate. b. Real interest rate is the rate of which the purchasing power of an investment increases. c. A cash ow expressed in nominal terms if the actual dollars to be received or paid out are given; A cash ow is expressed in real terms if the current, or date 0, purchasing power of the cash ow is given. 7. a.APR=1.25%*12=15% b.Annually compounded rate= (1 + 1 . 25%) 12-1 = 16 . 08% 2...
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This note was uploaded on 04/13/2010 for the course ECO 389 taught by Professor Chen,j during the Spring '08 term at SUNY Stony Brook.

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solutionHW1 - . 08) 3 = 1 , 533 6. a. Nominal interest rate...

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