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Econ 520
F 10
Homework 2
10/5, 10/7, due 10/8
For full credit, show your calculation on each computational question.
3.1
(10 homework points)
What is the present discounted value of $1000.00, payable in
8 years and
not indexed for inflation
, if the
real
interest rate is 4.00% and the
nominal
interest rate is 6.00%?
(Assume annual compounding and give your answer to the
nearest cent.
Not all information is necessarily used.)
Show your calculation.
3.2
(10 homework points)
If the present discounted value of $1000.00, payable in 8
years and
indexed for inflation from today’s date
, is $567.89, what is the
real
interest
rate?
(Assume annual compounding, and give your answer to the nearest
basis point
, ie
to the nearest .01%)
Show your calculation.
3.3
(10 homework points)
What is the present value of a perpetual income stream of
$8000 per year,
indexed for inflation from today’s date
, if the
real
interest rate is 4%
and the
nominal
interest rate is 8%?
(Not all information is necessarily used.)
Show
your calculation.

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