COMP_DISC_XTRA_PROBS

# COMP_DISC_XTRA_PROBS - Problem Set#1 Compounding and...

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Problem Set #1 Compounding and Discounting Page.1 Problem Set #1 Compounding and Discounting 1. Find the values of the 6-month, 1-year and 5-year discount factors ( DF 0 . 5 , DF 1 , DF 5 ) when (a) the annual interest rate is 7% compounded annually; (b) the annual interest rate is 11% compounded semiannually; (c) the monthly interest rate is 0.8%; (d) the continuously compounded annual interest rate is 9%; (e) the annual interest rate is 14.6% compounded daily (assuming 365 days a year). Show all your calculations. 2. Suppose that a savings account oﬀers you an annual interest rate of 10% compounded quar- terly. Calculate the equivalent annual rate compounded (a) every year; (b) semiannually; (c) monthly; (d) daily; (e) continuously. Your answers should all show 2 decimals (e.g. 9.12%). Show all your calculations. 3. You have won the Florida state lottery. Lottery oﬃcials oﬀer you the choice of the following alternative payments: Alternative 1: \$10,000 one year from now. Alternative 2: \$20,000 ﬁve years from now. Which alternative should you choose if the annual discount rate is (a) 0%? (b) 10%? (c) 20%? (d) What discount rate makes the two alternatives equally attractive to you? 4. Suppose you deposit \$1,000 in an account at the end of each of the next four years. If the account earns 12% annually, how much will be in the account at the end of seven years? 5. Find an expression for the exact eﬀective annual rate of interest at which payments of \$300 at the present, \$200 at the end of one year, and \$100 at the end of two years will accumulate to \$700 at the end of two years. 6. Suppose that you invest a certain amount of money in a savings account which is earning an annually compounded interest rate of r . In exactly how many years (as a function of r ) will that amount of money be doubled?

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Problem Set #1 Compounding and Discounting Page.2 7. Suppose that you invest \$100 in a savings account which is earning an annual interest rate of 8% (compounded annually). What is the ﬁrst year in which the interest credited to your account for that year exceeds your original investment in the account? 8. The present value of two payments of \$100 each to be made at the end of n years and 2 n years is \$100. Find a general expression for n if the annual interest rate (compounded every year) is r . 9. Your parents make you the following oﬀer: they will give you \$500 at the end of every month for the next ﬁve years if you agree to pay them back \$500 at the end of every month for the following ten years. Should you accept this oﬀer if your opportunity cost is 12% a year (compounded annually)? 10. A man aged 40 wishes to accumulate a fund for retirement by depositing \$1,000 at the beginning of each year for 25 years. Starting at age 65, he will make 15 annual withdrawals at the beginning of each year. Assuming that all payments are certain to be made, ﬁnd
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## This note was uploaded on 03/13/2012 for the course UGBA 103 taught by Professor Berk during the Spring '07 term at Berkeley.

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COMP_DISC_XTRA_PROBS - Problem Set#1 Compounding and...

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