chapter 4 solutions-1

# chapter 4 solutions-1 - 0.75 = \$96.41 Option(a and option(b...

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Chapter 4 Solutions to Assigned Problems: 1. Future value in 5 years = \$100*(1.08) 5 = \$146.93 Future value in 10 years = \$100*(1.08) 10 = \$215.89 Future value in 15 years = \$100*(1.08) 15 = \$317.22 2. For 20 years: \$1*(1.107) 20 = \$7.64 For 10 years: \$1*(1.107) 10 = \$2.76 For 30 years: \$1*(1.107) 30 = \$21.11 3. 6 months: Present Value = 100/(1.04) 0.5 = \$98.06 5 years: Present Value = 100/(1.04) 5 = \$82.19 10 years: Present Value = 100/(1.04) 10 = \$67.56 4. Future Value for option (a) = \$1000*(1.05) 2 *(1.07) 2 = \$1262.25 Future Value for option (bi) = \$1000*(1.06) 4 = \$1262.48 You will choose option (bi) 5. If i =5%, Future Value = \$1000*(1.05) 10 = \$1628.89 If i =10%, Future Value = \$1000*(1.10) 10 = \$2593.74 6. If i =5%, Present Value of option (a) = \$50/(1.05) 0.5 + \$50/(1.05) = \$96.41 Present Value of option (bi) = \$100/(1.05)
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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 5-year 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 5-year 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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