Assignment #3 answers

Assignment #3 answers - Answers to Assignment No. 3 Chapter...

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Answers to Assignment No. 3 Chapter 4- Questions and Problems: Answer to Q 6 You should compare the present values of the two annuities. Discount Present Value of Present Value of Rate 10-year, $1000 annuity 15-year, $800 annuity a. 5% 7721.73 8303.73 b. 20% 4192.47 3740.38 When the interest rate is low, as in part (a), the longer (i.e., 15-year) but smaller annuity is more valuable because the impact of discounting on the present value of future payments is less severe. When the interest rate is high, as in part (b), the shorter but higher annuity is more valuable. In this case, with the 20 percent interest rate, the present value of more distant payments is substantially reduced, making it better to take the shorter but higher annuity. Answer to Q 14 Semiannual compounding means that the 8.5 percent loan really carries interest of 4.25 percent per half year . Similarly, the 8.4 percent loan has a monthly rate of .7 percent. APR Period m Effective annual rate = (1 + per period rate) m – 1 8.5% 6 months 2 (1.0425) 2 1 = .0868 = 8.68% 8.4% 1 month 12 (1.007) 12 1 = .0873 = 8.73% Choose the 8.5 percent loan for its slightly lower effective rate. Answer to Q 21 a. PV = 100 × annuity factor (6%, 3 periods) = 100 × 1 .06 1 .06(1.06) 3 = $267.30
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b. If the payment stream is deferred by an extra year, each payment will be discounted by an additional factor of 1.06. Therefore, the present value is reduced by a factor of 1.06 to 267.30/1.06 = $252.17. Answer to Q 26
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Assignment #3 answers - Answers to Assignment No. 3 Chapter...

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