. Evaluate the following statement:Consider two riskless perpetuities: (i) pays $120 every year; (ii) pays $10 every month. If the rates of returns of the two perpetuities are the same, investors must buy perpetuity (ii) because it makes more interest payments.
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. Evaluate the following statement:
Consider two riskless perpetuities: (i) pays $120 every year; (ii) pays $10 every month. If
the
because it makes more interest payments.
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Solved in 2 steps
- Consider two riskless perpetuities: (i) pays $120 every year; (ii) pays $10 every month. If the rates of returns of the two perpetuities are the same, investors must buy perpetuity (ii) because it makes more interest payments.You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT? a. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. b. The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. c. The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. d. The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. e. If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.You are considering investing in a security that will pay you $5,000 in 29 years. If the appropriate discount rate is 12 percent, what is the present value of this investment? b. Assume these investments sell for $2,423 in return for which you receive $5,000 in 29years. What is the rate of return investors earn on this investment if they buy it for $2,423? If the appropriate discount rate is 12 percent, the present value of this investment is
- You are considering investing in a security that will pay you $2,000 in 35 years. a. If the appropriate discount rate is 10 percent, what is the present value of this investment? b. Assume these investments sell for $275 in return for which you receive $2,000 in 35 years. What is the rate of return investors earn on this investment if they buy it for $275?A You are considering investing in a security that will pay you $1000 in 30 years. If the appropriate discount rate is 10%, what is the present value of this investment? Assume these investments sell for $365, in return for which you receive $1000 in 30 years, what is the rate of return investors earn on this investment if they buy it for $365? b What is the accumulated sum of each of the following streams of ordinary annuity payments? $35 per half-year for three and a half years at 14% p.a. compounded half- yearly. $25 a year for three years compounded annually at 2%. $500 a year for 10 years compounded annually at 5%You are considering a safe investment opportunity that requires a $1,080 investment today, and will pay $710 two years from now and another $610 five years from now. a. What is the IRR of this investment? b. If you are choosing between this investment and putting your money in a safe bank account that pays an EAR of 5% per year for any horizon, can you make the decision by simply comparing this EAR with the IRR of the investment? Explain. a. What is the IRR of this investment? The IRR of this investment is _____________%. (Round to two decimal places.)
- You are considering the choice between investing £50,000 in a conventional 1-year financial asset such as (Certificate of Deposit) offering an interest rate of 5% and a 1-year “InflationPlus” offering 1.5% per year plus the rate of inflation. (a) Which is the safer investment and why? Which offers the higher expected return and why? If you expect the rate of inflation to be 3% over the next year, which is the better investment? Explain. If we observe a risk-free real rate of 5% per year and a risk-free real rate of 1.5% on inflation indexed bonds, can we infer that the market’s expected rate of inflation is 3.5% per year?You are considering a safe investment opportunity that requires a $780 investment today, and will pay $870 two years from now and another $640 five years from now. a. What is the IRR of this investment? b. If you are choosing between this investment and putting your money in a safe bank account that pays an EAR of 5% per year for any horizon, can you make the decision by simply comparing this EAR with the IRR of the investment? Explain.Suppose that a risk free investment will make three future payme Suppose that a risk-free investment will make three future payments of $100 in one year, $100 in two years, and $100 in three years. If the Federal Reserve has set the risk-free interest rate at 8 percent, what is the proper current price of this investment? What if the Federal Reserve raises the risk-free interest rate to 10 percent? Suppose that a risk free investment will make three future payme
- You have the choice of two equally risky annuities, each paying $5,000 per year for 8 years. One is an annuity that pays at the beginning of the year and the other is an annuity that pays at the end of the year. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth? A. Since we don't know the interest rate, we can't find the value of the annuities and hence we cannot tell which one is better. B. either one because they have the same present value C. the annuity that pays at the beginning of the year D. the annuity that pays at the end of the yearYou plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? Group of answer choices The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. The discount rate decreases. The riskiness of the investment's cash flows increases. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. The discount rate increases.You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment? The discount rate decreases. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. The discount rate increases. The riskiness of the investment's cash flows decreases. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
