Detailed solution
1) A bank investment is offering a rate of 6% every two years. What is the annual equivalent rate of interest?
2) Suppose the price of a 2 year zero coupon bond with face value of 10,000 is equal to $9,000 today. What is the present value of receiving 200,000 two years from now.
3) You have an asset that will pay you a first payment of $10 in 2 years, then every year for the next 100 years. Assuming a cost of capital of 10%, what is the approximate present value of these 101 payments?
4) Starting exactly 11 years from now, you will receive a perpetual annual cash flow equal to $100. Assume that the discount rate from year 10 onwards will remain constant at 10%. Suppose the price of a 10 year zero coupon bond with face value of 10,000 is equal to $5,000 today. What is the present value of this perpetual annual cash flow today?
5) You would like to borrow $1,000,000 over 100 months to finance a home. If your mortgage rate is 6% APR compounded monthly what are your monthly payments?