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Unformatted text preview: Mathematical Finance 1. What is the effective annual interest rate when the nominal interest rate of 10% is compounded (a) twice yearly (b) quarterly (c) continuously? 2. You deposit amount D in a bank which pays interest at nominal rate r . How many years does it take for your money to (a) double when interest is compounded continuously and r = 0 . 1; (b) quadruple when interest is compounded annually and r = 0 . 05? Find an expression for the number of years required for your money to increase to αD when the interest is compounded annually. 3. An investment offers returns of 500 at the end of year one and A at the end of year two for an initial payment of 1,000 at the start of year 1. Find the rate of return when the value of A is: (a) 300 (b) 500 (c) 700. 4. You plan to invest amount a at the start of each of the next 60 months. The an- nual interest rate is 6% compounded monthly. How big should a be to ensure your investment has value 100,000 at the end of 60 months. 5. The start-of-year cash flows of an investment are- 1 , 000- 1 , 200 800 900 800 Suppose you can borrow or invest cash at an interest rate of 6% compounded annually. Is the investment worthwhile?...
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This note was uploaded on 02/04/2011 for the course MATH 3301 taught by Professor Dri.m.macphee during the Spring '10 term at Durham.
- Spring '10