Hw Chapter4 Essay
Compounded monthly, 10% APR compounded annually, and 9% APR compounded daily. Compute the EAR for each investment choice. (Assume that there are 365 days in the year.)
Sol:
1+EAR= (1+r/k)k
So, for 10% APR compounded monthly, the EAR is 1+EAR= (1+0.1/12)12 = 1.10471
=> EAR= 10.47%
For 10% compounded annually, the EAR is
1+EAR= (1+0.1)=1.1 * EAR= 10% (remains the same).
For 9% compounded daily
1+EAR= (1+0.09/365)365 = 1.09416 * EAR= 9.4%
58. You can earn $50 in interest on a $1000 deposit for eight months. If the EAR is the same regardless of the length of the investment, how much interest will you earn on a $1000 deposit for
a. 6 months. …show more content…
We do not have to pay taxes on this amount of new borrowing, so this is our aftertax benefit of switching cards.
528. Consider a project that requires an initial investment of $100,000 and will produce a single cash flow of $150,000 in five years.
a. What is the NPV of this project if the fiveyear interest rate is 5% (EAR)?
b. What is the NPV of this project if the fiveyear interest rate is 10% (EAR)?
c. What is the highest fiveyear interest rate such that this project is still profitable?
Sol:
a. NPV = –100,000 + 150,000 / 1.055 = $17,529.
b. NPV = –100,000 + 150,000 / 1.105 = –$6862.
Here we need to calculate the IRR.
Therefore,
IRR = (150,000 / 100,000)1/5 – 1 = 8.45%.
532. Suppose the current oneyear interest rate is 6%. One year from now, you believe the economy will start to slow and the oneyear interest rate will fall to 5%. In two years, you expect the economy to be in the midst of a recession, causing the Federal Reserve to cut interest rates drastically and the oneyear interest rate to fall to 2%. The oneyear interest rate will then rise to 3% the following year, and continue to rise by 1% per year until it returns to 6%, where it will remain from then on.
a. If you were certain regarding these future interest rate changes, what twoyear interest rate would be consistent with these expectations?
b. What current

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