Question
a) You are thinking of buying a fridge-freezer. Two competitive retailers, Flurrys Plc and Power-House Plc sell this machine with a price tag of £500. They have a buy now pay later scheme with Flurrys Plc charging a flat interest rate of 9.4% with monthly compounding and Power-House Plc charging a rate of 9.2% with quarterly compounding. If you plan to repay in one year's time, which retailer would you prefer to buy your machine from? What are the EARs charged by the two firms?
b) You borrow £30,000 from a friend and agree that you will repay the loan by five equal end-of-year installments. Your friend will charge you a constant annual interest rate of 5%. What will be your annual repayments?
c) A 6 year government bond (with a face value of £100) makes annual coupon payments of 5% and offers a yield to maturity of 3% annually compounded. Suppose that one year from now the bond still yields 3%. If you buy the bond today and sell it after one year, what is the return on your investment over the 12 month period?