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Unformatted text preview: Assignment 2 ACTSC231 (Mathematics of Finance), FALL 2010 Due: October 22(Friday) Hand in to the instructor in class To earn the credit of the assignment, you need to justify your answer. Simply listing the final answer is unacceptable. I might only select a part of the assigned questions to be marked, and your credit for this assignment will be calculated according to your performance on those selected questions. However, in order to obtain the full credit for this assignment, you need to do all the assigned questions. You must place the present page on the top of your solutions as the cover and combine them together, and put your name, UW ID number and section number very clearly in the corresponding blanks below. If you fail to do so, 5% of your grade will be taken off for this assignment. Name: UW ID #: Section: The problems are not in the order of difficulties. 6 points for each question. 1. Two projects have equal present values when calculated using a 6% annual effective interest rate. Projet 1 requires an investment of $20,000 immediately and will return $10,000 at the end of one year and $13,000 at the end of two years. Project 2 requires investments of $10,000 immediately and $X in two years. It will return $5,000 at the end of one year and $11,660 at the end of three years. Find, respectively, the present values of those two projects by using an annual effective interest rate of 5%. Hint: Suppose in a project, you need to invest $ a immediately and get return $ b after 2 years and $ c after 3 years. Suppose the annual effective interest rate is i . Then the present value of your project is PV = PV of your returns- PV of your investment = b · v 2 + c · v 3- a. 2. Fund A has a balance of $100,000 at time t = 0 and its growth is determined by a force of interest δ ( A ) t = . 05 1 + 0 . 05 t . Find B has a balance of $120,000 at time t = 0, and its growth is determined by a force of interest...
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This note was uploaded on 01/21/2011 for the course ACTSC 231 taught by Professor Chisholm during the Fall '09 term at Waterloo.
- Fall '09