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Unformatted text preview: Problem 20 FV = PV(1+r)^T 4 = 3(1 + r) r = 0.33 = APR = 0.33 * 365/7 = 17.38 = 1738.1% EAR = (1 + r/m)^m  1 = 3,270,864.56 = 327086456.43% Problem 21 Annual FV = C0(1 + r)^T = 1,000 (1 + 0.08)^3 = $1,259.71 Semiannual FV = C0(1 + r/m)^mT = 1,000 (1 + 0.08/2) ^ 2*3 = $1,265.32 Month FV = C0(1 + r/m)^mT = 1,000 (1 + 0.08/12) ^ 12*3 = $1,270.24 Continuous FV = C0 * e^rT = $1,271.25 The future value increases when the compounding period shortens because the interest on the principal at the end of each period is added to the amount of money we have invested. Thus the amount of money on which the interest payment will be calculated will be greater thus yielding a greater future value. Problem 22 Simple FV = PV * (r * T + 1) = PV * (0.08 * 10 + 1)= PV * 1.8 Compound FV = PV(1 + r)^T = PV ( 1 + r) ^ 10 Both future values for both banks should be the same PV * 1.8 = PV ( 1 + r) ^ 10 1.8 = ( 1 + r ) ^ 10 r = 0.06 = Problem 23 FV = FVstock + FVbond = Cs[((1+rs)^T  1)/rs] + Cb[((1+rb)^T  1)/rb] = 700[((1 + 0.11)^30  1)/0.11] + 300[((1FV = FVstock + FVbond = Cs[((1+rs)^T  1)/rs] + Cb[((1+rb)^T  1)/rb] = 700[((1 + 0....
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 Fall '09
 Lomev
 Corporate Finance

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