MATH 2280 Assignment 2
Online submissions only (open office or microsoft spreadsheet or word document or pdf) by Wednesday Sep 30, 11:59pm.
1) The nominal annual interest rate is 8% compounded monthly.
Deal A: You loan me $5000 today and I pay you back $2000 in 1 year, and $4000 in 2 years.
Deal B: I loan you $1000 today and another $3000 in 1 year and you pay me $X in 2 years.
What does $X have to be for you to be indifferent between these two deals?
2) On August 11, 2017 Karishma buys a T-bill with a face value of $5000 maturing on Jan 31, 2018. She pays $4,890.99. Use the ACT/365 daycount convention.
a) What is the annual simple discount rate?
b) What annual simple interest rate is she earning?
c) Karishma plans to sell the T-bill on the first day on which it is worth at least $4950. What day is that? How much does she actually get when she sells?
3) (This is 1.2.7S from the text, which means it is also a question from a previous FM exam) David can receive on of the following two payment streams:
• 100 at time 0, 200 at time n, and 300 at time 2n
• 600 at time 10
At an annual effective interest rate i, the present values of the two streams are equal. Given vn = 0.75941, determine i. (Remember v = 1 / (1 + i).)
4) The effective annual interest rate is 2%, and inflation is running at 1.5% annually. Berko pays income tax on his interest income each year at a 30% rate (that is, whatever interest he earns, he pays 30% of that amount to the government in taxes).
a) Ignoring taxes, what is Berko’s inflation adjusted return on investment?
b) Ignoring inflation, what is Berko’s effective annual after tax interest rate on his investment?
c) What is Berko’s inflation adjusted, after tax return on investment?
•