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FM Homework Assignment 1 (Questions)

The document outlines a homework assignment consisting of various financial calculations, including future and present value assessments, ranking of cash flows based on different interest rates, and evaluations of investment opportunities. Specific questions require calculations related to interest rates, loan payments, bond valuations, and retirement planning. Students are instructed to submit their answers by March 16th via the i-Learning plus platform.

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李少珠 Anancha
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13 views2 pages

FM Homework Assignment 1 (Questions)

The document outlines a homework assignment consisting of various financial calculations, including future and present value assessments, ranking of cash flows based on different interest rates, and evaluations of investment opportunities. Specific questions require calculations related to interest rates, loan payments, bond valuations, and retirement planning. Students are instructed to submit their answers by March 16th via the i-Learning plus platform.

Uploaded by

李少珠 Anancha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Homework Assignment 1(Questions)

1. Calculate the future value of $2000 in:


a. Five years at an interest rate of 5% per year.
b. Ten years at an interest rate of 5% per year.
c. Five years at an interest rate of 10% per year.
d. Why is the amount of interest earned in part (a) less than half the amount of
interest earned in part (b)?

2. What is the present value of $10,000 received:


a. Twelve years from today when the interest rate is 4% per year?
b. Twenty years from today when the interest rate is 8% per year?
c. Six years from today when the interest rate is 2% per year?

3. Consider the following alternatives:


i. $100 received in one year
ii. $200 received in five years
iii. $300 received in ten years
a. Rank the alternatives from most valuable to least valuable if the interest rate is
10% per year.
b. What is your ranking if the interest rate is only 5% per year?
c. What is your ranking if the interest rate is 20% per year?

4. You have just received a windfall from an investment you made in a friend’s
business. He will be paying you $10,000 at the end of this year, $20,000 at the end
of the following year, and $30,000 at the end of the year after that (three years from
today). The interest rate is 3.5% per year.
a. What is the present value of your windfall?
b. What is the future value of your windfall in three years (on the date of the last
payment)?
5. You have a loan outstanding. It requires making three annual payments at the end of
the next three years of $1000 each. Your bank has offered to allow you to skip
making the next two payments in lieu of making one large payment at the end of
the loan’s term in three years. If the interest rate on the loan is 5%, what final
payment will the bank require you to make so that it is indifferent between the two
forms of payment?

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6. The British government has a consol bond outstanding paying £100 per year
forever. Assume the current interest rate is 4% per year.
a. What is the value of the bond immediately after a payment is made?
b. What is the value of the bond immediately before a payment is made?

7. What is the present value of $1000 paid at the end of each of the next 100 years if
the interest rate is 7% per year?

8. You have decided to buy a perpetuity. The bond makes one payment at the end of
every year forever and has an interest rate of 5%. If you initially put $1000 into the
bond, what is the payment every year?

9. You have an investment opportunity that requires an initial investment of $5000


today and will pay $6000 in one year. What is the IRR of this opportunity?

10. You are thinking of retiring. Your retirement plan will pay you either $250,000
immediately on retirement or $350,000 five years after the date of your retirement.
Which alternative should you choose if the interest rate is:
a. 0% per year?
b. 8% per year?
c. 20% per year?

(All of you have to hand in your answer sheet through i-Learning plus platform before
March 16th)

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