Demo Qs Topic 2 Part 1 - DEMONSTRATION LECTURE QUESTIONS...

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DEMONSTRATION LECTURE QUESTIONS AND SOLUTIONS TOPIC 2 FINANCIAL MATHS Question 1 $100 to be received at the end of 3 years is worth how much today, assuming a discount rate of (i) 10 per cent (ii) 100 per cent (iii)0 per cent? ( 29 n n r 1 FV PV - + = ( 29 PV = + = - 100 1 010 13 3 . $75. ( 29 PV = + = - 100 1 1 50 3 $12. ( 29 PV = + = - 100 1 0 00 3 $100. (i) (ii) (iii) Solution 1
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Question 2 At the end of 5 years, how much is an initial $500 deposit plus annual $100 payments worth, assuming an annual interest rate of (i) 10 per cent (ii) 5 per cent (iii) 0 per cent? ( 29 ( 29 - + + + = r r PMT r PV FV n n 1 1 1 0 ( 29 ( 29 FV = + + + - = + = 500 1 010 100 1 010 1 010 80526 61051 41577 5 5 . . . . . $1, . ( 29 ( 29 FV = + + + - = + = 500 1 005 100 1 005 1 005 63814 552 56 190 70 5 5 . . . . . $1, . FV = $1, . 00000
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Question 3 What is the present value of $500 to be received at the end of each of the next 3 years, assuming a discount rate of (i) 4 per cent (ii) 25 per cent? Solution ( 29 + - = - r r 1 1 PMT PV n ( 29 PV = - + = - 500 1 1 004 004 387 55 3 . . $1, . ( 29 PV = - + = - 500 1 1 0 25 0 25 00 3 . . $976. (i) (ii)
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Question 4 If Miss Smith is offered the choice of: (a) $628.06 now; or (b) $50 per quarter for four years at 12% per annum compounded quarterly; or (c) $1007.85 at the end of four years; which alternative should you recommend that she accept? Solution . Need common base to compare the alternatives. Simplest approach is to convert each alternative to a present value (although it wouldn't matter if the base chosen for comparison was the annuity or the future value). 06 . 628 $ PV = ( 29 ( 29 06 . 628 $ 03 . 0 03 . 0 1 1 50 r r 1 1 PMT PV 16 n = + - = + - = - - ( 29 ( 29 06 . 628 $ 03 . 0 1 85 . 1007 r 1 FV PV 16 n n = + = + = - -
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Question 5 Your friend is celebrating his 35th birthday today and wants to start saving for his anticipated
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Demo Qs Topic 2 Part 1 - DEMONSTRATION LECTURE QUESTIONS...

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