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Chapter 4

Chapter 4 - the power of the number of each year B To take...

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Chapter 4 Conceptual Problems 1. 5 years: \$146.93, 10 years: \$215.89, 15 years: \$317.22 2. 6 months: \$98.06, 5 years: \$82.19, 10 years: \$67.56 3. Present value of bond principal at 3% is \$862.61, Present value of bond principal at 4% is \$821.93. 4. I would choose the .5 percent interest per month for five years because if I were to invest \$100 at the end of that five years and it were a compound interest, I would have about \$460. Whereas if I were to take the 30 percent over 5 years I would only have \$371.29. 5. The real return on my deposit would be the present value times 1.08. 6. A. The calculation would be the present value concept. You would need to put away a certain amount each year for twenty years taking into consideration the interest rate. To get \$50,000 a year you would need \$1 million minus the interest you would accrue. This would be done with a sequence of \$50,000 payments divided by 1 plus the interest rate to
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Unformatted text preview: the power of the number of each year. B. To take inflation into account, you must find the real interest rate, the one that is adjusted for inflation. If the inflation rate is 2 percent, the real interest rate of return would be 5 percent. The real interest rate would be the nominal interest rate minus the expected inflation. 7. A. You would use the internal rate of return. You would need to divide the yearly return by the interest rate paid and need to make this amount every year in order to pay for your investment. \$2,000= Revenue per year/(1+i)+ Revenue per year /(1+i)squared+ Revenue per year /(1+i) cubed B. \$1,750= Revenue per year/ (1+i) + Revenue per year / (1+i) squared+ Revenue per year / (1+i) cubed 8. C. If interest were at 10 percent the equation would be \$2,000= Revenue per year/(1.1)+ Revenue per year /(1.1)squared+ Revenue per year /(1.1) cubed...
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