Question

1)         Currency appreciation: Consider price of beer. Let's pretend that last year a bottle of beer used to cost one dollar, but this year it costs two dollars per bottle.

                        a)         This means beer costs twice as much as last year; or beer price has gone up by ___________%

                        b)         One dollar buys half as much beer as last year; or dollar has fallen in value by ___________%

            Note: The same idea works for relative values of currencies, i.e. appreciation of Yen against the dollar or depreciation of dollar against the Yen.

2)         Do problem 1 using different data. Last year a bottle of beer used to cost $ 0.50, but this year it costs $ 0.60.

              a) Beer price has gone up by    _________%

              b) Dollar has fallen in value by       _________%

3)         Find PVfor following cash flows using a discount rate of 10% per period, all periods are of the same (but unspecified) duration.

                     0_____1_____2_____3_____4

                            $10      $10      $10      $110

              a) use calculator, make sure that you know the procedure.

              N=____, PMT=_____, i=____, FV=_____,                                                              

              PV=_____

              b) use spreadsheet, make sure that you know the procedure

                     PV=________

              c) use intuition:    PV=_____because ____________________

                     Hint: Compare coupon rate and discount rate.

              d) if we use a higher discount rate the PV will be                                                        higher/lower

Answer 1

1. Currency appreciation: Consider price of beer. Let's pretend that last year a bottle of beer used to cost one dollar, but this year it costs two dollars per bottle.

a) This means beer costs twice as much as last year; or beer price has gone up by 100% [(Current price - last year price) / last year price = (2 - 1) / 1 = 100%]

b) One dollar buys half as much beer as last year; or dollar has fallen in value by 50% [(Current price - last year price) / Current price = (2 - 1) / 2 = 50%]

Note: The same idea works for relative values of currencies, i.e. appreciation of Yen against the dollar or depreciation of dollar against the Yen.

2) Do problem 1 using different data. Last year a bottle of beer used to cost $ 0.50, but this year it costs $ 0.60.

a) Beer price has gone up by 20% [(Current price - last year price) / last year price = (0.60 - 0.50) / 0.50 = 20%]

b) Dollar has fallen in value by 16.67 % [(Current price - last year price) / Current price = (0.60 - 0.50) / 0.60 = 16.67%]

3) Find PV for following cash flows using a discount rate of 10% per period, all periods are of the same (but unspecified) duration.

     0_____1_____2_____3_____4

                            $10      $10      $10      $110

a) use calculator, make sure that you know the procedure.

N=4, PMT=-4, i=10%, FV=-100,                                                              

PV=$100

d) if we use a higher discount rate the PV will be Lower