Fi 410 Ch 2

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Chapter 2 The Time Value of Money and Net Present Value Solutions to Questions 2.1 to 2.43 appear in the text. 2.44 What is a perfect market? What were the assumptions made in this chapter that were not part of the perfect market scenario? Answer: A perfect market is one with no taxes, no transaction costs, no differences in opinion, and many buyers and sellers. In this chapter, we also are assuming no uncertainty and no inflation. 2.45 What is the difference between a bond and a loan? Answer: No difference really. A bond is a loan. 2.46 In the text, I assumed you received the dividend at the end of the period. In the real world, if you received the dividend at the beginning of the period instead of the end of…show more content…
Thus, it will take about 14 years and 3 months. To find out how long it will take to triple your money, solve for x: (1 + 5%)x ’ (1 + 200%) ( x ( 22.5. Tripling will take 22.5 years, or 22 years and 6 months. 2.56 If the interest rate is 8% per annum, how long will it take to double your money? Answer: (1 + 0.08)x ’ (1 + 100%) ( x ’ log(2)/log(1.08) ( 9. Thus, it will take just about 9 years. 2.57 From Fibonacci’s Liber Abaci, written in the year 1202: “A certain man gave 1 denaro at interest so that in 5 years he must receive double the denari, and in another 5, he must have double 2 of the denari and thus forever. How many denari from this 1 denaro must he have in 100 years?” Answer: First, solve for the interest rate: 1d ( (1 + r)5 ’ 2d ( r ( 14.87%. Therefore, in 100 years, he will have (1 + r)100 ’ 1,048,576 denari. Of course, you can solve this in a simpler way: You have twenty 5-year periods, in each of which the holdings double. The answer is 220 denari. *2.58 A bank quotes you a loan interest rate of 14% on your credit card. If you charge $15,000 at the beginning of the year, how much will you have to repay at the end of the year? Answer: The effective interest rate is (1 + 14%/365)365 − 1 ( 15%. Thus, you will have to repay $15,000 ( 1.15 ’ $17,250.

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