Write the future value equation b.Write down the present value equation… 1 answer below »
Exercise1
Question 1
a.Write the future value equation
b.Write down the present value equation
c.Write down the continuous compounding equation
Question 2
Rakesh deposits $1,000 with Barclays Bank. If interest rates in the market are at 10%:
a.How much will Rakesh have in total after 1year using simple interest?
b.How much will Rakesh have in total after 1year using compounding?
c.Mehta has deposited $1,000 into an account that pays 10% compounded continuously in1year
d.Comment on your answers in (a), (b) and (c) above
Question 3: Future Value
Rakesh deposits $10,000 with Barclays Bank. If interest rates in the market are at 10%:
a.How much will Rakesh have in total after 5years using simple interest?
b.How much will Rakesh have in total after 5years using compounding?
c.How much will Rakesh have in total after 5years using continuous compounding?
d.Comment on your answers in (a) and (b) above.
Question 4
Rakesh wants to buy a house worth $100,000 after 5years. If interest rates in the market are at 10%:
a.How much should Rakesh deposit with the HSBC if he is to achieve his goal?
Question 5
Rakesh is given the following stream of future cash flows:
Year 
Expected Future Cash Flow 
1 
$15,000 
2 
$50,000 
3 
$20,000 
4 
$25,000 
5 
$100,000 
a.Determine the present value of the above cash flow stream given that interest rates are at10%
Question 6
Complete the loan amortization schedule below for a $100,000 loan with 10% interest per annum over a 5year repayment period
Exercise 2
Question 1
You are given the following data about two investment projects:
Year 
Project Y 
Project Z 
0 
$150,000 
$100,000 
1 
$50,000 
$35,000 
2 
$75,000 
$60,000 
3 
$100,000 
$80,000 
Given that the discount rate is 10% and the desired payback is 2 years:
Required:
1. Calculate the payback period of each project
2. Which project will you accept if they are independent and why?
3. Calculate the NPV of each project.
4. Which project will you accept if they are mutually exclusive and why?
5. Which method (payback or NPV) is better at project valuation and why?
Question 2
With a total budget of $500,000 and given the following data, which project or project combination would you prefer using the Profitability Index Approach?
Project A 
Project B 
Project C 
Project D 

Initial Outlay 
$250,000 
$125,000 
$150,000 
$300,000 
NPV 
$100,000 
$85,000 
$90,000 
$225,000 
Exercise 3
Practice Question 1
1. What is the value of a 5year 7% annual coupon bond when the discount rate is
a. 6%
b. 7%
c. 8%
d. Show that the results obtained above are consistent with the relationship between the coupon rate, discount rate, and price relative to par given in the text?
Practice Question 2
2. Calculate the price of a:
a. 4year 10% annual coupon bond with an 8% discount rate
b. 4year 10% semiannual coupon bond with an 8% discount rate
Practice Question 3
3. What is the value of a:
a. 5year zero coupon bond with a par value of $1000 and an 8% discount rate?
b. Perpetuity which pays $1500 annually when the yield to maturity is 10%
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