Question

In: Economics

You are offered a deal that pays you $1,000/yr (end of year) for 5 years, starting...

  • You are offered a deal that pays you $1,000/yr (end of year) for 5 years, starting 5 y from today. At a discount rate of 6%, what’s that deal worth right now? (CF’s: 0,0,0,0,0,1000,1000,1000,1000,1000).

  • Nominal annual interest is quoted at 7.50%.

    • With monthly payments, what’s effective annual interest? (1pt)

    • What about daily payments? (1pt)

    • What about payments every other year?

Solutions

Expert Solution

1. Here we are required to calculate the present worth of the cash flow. The given question states that first payment will be made at the end of 5th year.

2. Nominal rate = 7.50%

Effective rate of interest can be determined using the following formula

m = number of times compounding is done

A. When compounded monthly then, m = 12

Effective rate of interest = 7.76% compounded monthly

B. When compounded daily, m = 360 days (assume)

Effective rate = 7.79% compounded daily

C. When compounded every other month that is after 2 months

m = 6

Effective rate = 7.74 %

Please contact if having any query will be obliged to you for your generous support. Your help mean a lot to me, please help. Thank you.

Rahul Sunny answered 2 years ago
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