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Unformatted text preview: E120 Homework 2 Due 07/08/2011 Problem 1: If the rate of inflation is 5%, what nominal interest rate is necessary for you to earn a 3% real interest rate on your investment? Problem 2: Suppose the term structure of risk-free interest rates is as follow: 1 year (1.99% EAR), 2 years (2.41%), 3 years (2.74%), 5 years (3.32%), 7 years (3.76%), 10 years (4.13%), 20 years (4.93%). 1. Calculate the present value of an investment that pays $1000 in two years and $2000 in five years for certain. 2. Calculate the present value of receiving $500 per year, with certainty, at the end of the next five years. To find the rates for the missing years in the table, linearly interpolate between the years for which you do know the rates. (For example, the rate in year 4 would be the average of the rate in year 3 and year 5.) Problem 3: Suppose your bank account pays interest monthly with an APR of 6%, compounded monthly . What amount of interest will you earn each month? If you have no money in the bank today, how much will you need to save at the end of each month to accumulate...
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- Summer '11