Reference no: EM133165751

Questions -

Q1. A security pays an annual cash flow of $0.9 forever. The appropriate discount rate is 9% per year. (Assume the first cash flow is paid one year from now.) What is the present value of all future cash flows?

Q2. You want to buy a house financed with a 15-year fixed-rate mortgage. The best interest rate you could find is 13% APR. Payments are made monthly, so the APR should be assumed to be a simple interest rate (i.e. the wrong thing) compounded monthly with no other adjustments. What is the most you can borrow if you can only afford to pay $1,500 per month?

Q3. You've bought an inflation-adjusted annuity to give you a constant real income during your retirement years. The annuity will make 20 annual payments. The first payment of $80,000 will occur one year from now, and annual payments will increase at the rate of inflation, 2%, for 19 years and then stop. The interest rate is 5%. What is the present value of these cash flows?

Q4. What is the present value of these cash flows? What is the AIR (the simple rate) on the loan? (Assume that there are exactly 52 weeks in a year.)

Q5. A security pays $800 every 8 years forever. The appropriate discount rate is 4% (EAR). What is the value of the security if the first payment occurs 5 years from now?