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Unformatted text preview: 0.75 = $96.41 Option (a) and option (b) have the same present value. If i =4%, Present Value of option (a) = $50/(1.04) 0.5 + $50/(1.04) = $97.11 Present Value of option (bi) = $100/(1.04) 0.75 = $97.10 Option (a) has a higher present value. 7. Present Value for 5year 5 percent coupon bond with face value of $1000 ( i =3%) = $50/(1.03) + $50/(1.03) 2 + $50/(1.03) 3 + $50/(1.03) 4 + $50/(1.03) 5 = $1091.59 Present Value for 5year 5 percent coupon bond with face value of $1000 ( i =4%) = $50/(1.04) + $50/(1.04) 2 + $50/(1.04) 3 + $50/(1.04) 4 + $50/(1.04) 5 = $1044.52 The present value falls when the interest rate rises to 4 percent. 8. real interest rate = 5%  3% = 2%...
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 Spring '08
 Hassan

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