BU111 Spring 2012 - Supplementary Questions

Determine the appropriate interest rate r 4 plug all

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Unformatted text preview: ent - Annuity - Annuity Due - Perpetuity 3. Determine the appropriate interest rate (r) 4. Plug all variables into the correct formula(s) Problem 9 Your sleazy cousin is offering you an “investment opportunity” that promises to pays $15,000 in 5 years if you put up $12,000 today. He assures you that the rate of return on this “opportunity” is well above the market interest rate of 4.75%. “You make $3,000 profit off of a $12,000 investment” he says. “That’s a 25% return!” Is your cousin right? Problem 10 Using your cunning knowledge of the time value of money, you try and trick your younger brother when settling your $100 debt. Instead of paying him the money upfront, you instead negotiate to pay $5 every year from now until the day you die. Interest rates are stable at 6%. How much money do you save from this deal? Problem 11 Amidst concerns over his job security, Ron Burgundy decides to put some money away for safe-keeping. He invests $40,000 in government bonds which guarantee 2% g...
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