1.) What is the relationship between present value and the rate of discount for a given future value?
2.) Would you believe a banker who told you that if you invested $1,000 in her bank, you would be a millionaire someday? How can this happen?
3.) What is the relationship between present value, future value, and the interest rate in the case of a perpetuity?
4.) why are security prices and interest rates inversely related?
5.) If the rate of discount in 20 percent,
a. would you rather receive $100 today or $120 in one year?
b. would you rather receive $205 today or $240 in one year?
c. would you rather receive $500 in one year or $610 in two years?
6.) Suppose that you are considering the purchase of a security that has the following timeline of payments:
a. How much would you willing to pay for this security if the market interest rate is 6 percent?
b. suppose that you have just purchased the security, and suddenly the market interest rate falls to 5 percent. What is the security worth?
c. suppose that two years have elapsed since you purchased the security, and you have received the first two payments of $600 each. Now suppose that the market interest suddenly jumps to 10 percent. How much would another investor be willing to pay for your security?
7.) Find the yield to maturity of the following securities:
a. A security paying $1,000 in one year, for which you pay $926 today.
b. A security paying $80 one year from now, and $1,080 two years from now, for which you pay $1,050 today.