Suppose the spot rates of interest for ivestment horizons of 1 to 5 years are 4%, and for 6 to 10 years are 5%. (a) Compute the forward rates of interest if for t = 1,2, -.. ,10. (b) Calculate the present value of an annuity-immediate of $100 over 10 years. (c) Compute the future value of the annuity-immediate at the end of year 10, assuming future payments earn the forward rates of interest, using equation (3.18). (d) Repeat part (c) using equation (3.14). You should get the same answer as in part (c). (e) Show that the future value of the annuity-immediate at the end of year 10, assuming future payments earn the spot rates of interest as at time 0, is 100 x (STOl0.05 - S0.05) + 100 × sl0.04°
Suppose the spot rates of interest for ivestment horizons of 1 to 5 years are 4%, and for 6 to 10 years are 5%. (a) Compute the forward rates of interest if for t = 1,2, -.. ,10. (b) Calculate the present value of an annuity-immediate of $100 over 10 years. (c) Compute the future value of the annuity-immediate at the end of year 10, assuming future payments earn the forward rates of interest, using equation (3.18). (d) Repeat part (c) using equation (3.14). You should get the same answer as in part (c). (e) Show that the future value of the annuity-immediate at the end of year 10, assuming future payments earn the spot rates of interest as at time 0, is 100 x (STOl0.05 - S0.05) + 100 × sl0.04°
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 6MC: You want to invest $8,000 at an annual Interest rate of 8% that compounds annually for 12 years....
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Transcribed Image Text:Suppose the spot rates of interest for ivestment horizons of 1 to 5 years are
4%, and for 6 to 10 years are 5%.
(a) Compute the forward rates of interest if for t = 1,2, -.. ,10.
(b) Calculate the present value of an annuity-immediate of $100 over 10
years.
(c) Compute the future value of the annuity-immediate at the end of year
10, assuming future payments earn the forward rates of interest, using
equation (3.18).
(d) Repeat part (c) using equation (3.14). You should get the same answer
as in part (c).
(e) Show that the future value of the annuity-immediate at the end of year
10, assuming future payments earn the spot rates of interest as at time
0, is
100 x (STOl0.05 - S0.05) + 100 × sl0.04°
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