Abc Chapter 4 Questions

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Annual Compounding 1. Compute the future value of $1,000 compounded annually for a. 10 years at five percent b. 10 years at seven percent c. 20 years at five percent d. Why is the interest earned in part (c) not twice the amount earned in part (a)? 2. Calculate the present value of the following cash flows discounted at 10 percent. a. $1,000 received seven years from today. b. $2,000 received one year from today. c. $500 received eight years from today. 3. Would you rather receive $1,000 today or $2,000 in 10 years? Assume a discount rate of eight percent. 4. The government has issued a bond that will pay $1,000 in 25 years. The bond will pay no interim coupon payments. What is the present value of the bond if the discount rate is 10 percent? 5. A firm has an estimated pension liability of $1.5 million due 27 years from today. If the firm can invest in a risk-free security with an interest rate of eight percent, how much must the firm invest today to be able to make the $1.5 million payment? 6. You have won the Florida state lottery. Lottery officials offer you the choice of the following alternative payouts: Alternative 1: $10,000,000 one year from now. Alternative 2: $20,000,000 five years from now. Which alternative should you choose if the discount rate is: a. 0 percent? b. 10 percent? c. 20 percent? d. What discount rate makes the two alternatives equally attractive to you? 7. You are selling your house. The Smiths have offered you $115,000. They will pay you immediately. The Joneses have offered you $150,000, but they cannot pay you until three years from today. The interest rate is 10 percent. Which offer should you choose? 8. Suppose you bought a bond that

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