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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 D 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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- Spring '10