Here are some alternative investments you are considering for one year. (i) Bank A promises to...
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Here are some alternative investments you are considering for one year. (i) Bank A promises to pay 8% on your deposit compounded annually. (ii) Bank B promises to pay 8% on your deposit compounded daily. Compare the effective annual rate (EAR) on these investments. (a) Suppose that you have purchased a 3-year zero-coupon bond with face value of $1000 and a price of $850. If you hold the bond to maturity, what is your annual rate of return? (b) Now suppose you have purchased a 3-year bond with face value of $1000, a 7% annual coupon, and a price of $975. Assuming that you hold the bond to maturity, is the IRR greater or less than the return on the bond in part (a)? Consider a project with the following cash flows co= -6,750; c = 4,500; = 18,000. (a) What is the NPV when the discount rate equals 0%? (b) What is the IRR of this project? That is, what is the discount rate that makes the NPV =0? (c) What range of discount rates makes this project worth taking? That is, what discount rates make the NPV>0? Here are some alternative investments you are considering for one year. (i) Bank A promises to pay 8% on your deposit compounded annually. (ii) Bank B promises to pay 8% on your deposit compounded daily. Compare the effective annual rate (EAR) on these investments. (a) Suppose that you have purchased a 3-year zero-coupon bond with face value of $1000 and a price of $850. If you hold the bond to maturity, what is your annual rate of return? (b) Now suppose you have purchased a 3-year bond with face value of $1000, a 7% annual coupon, and a price of $975. Assuming that you hold the bond to maturity, is the IRR greater or less than the return on the bond in part (a)? Consider a project with the following cash flows co= -6,750; c = 4,500; = 18,000. (a) What is the NPV when the discount rate equals 0%? (b) What is the IRR of this project? That is, what is the discount rate that makes the NPV =0? (c) What range of discount rates makes this project worth taking? That is, what discount rates make the NPV>0?
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Answer rating: 100% (QA)
Step 1 Calculate the Effective Annual Rate EAR for Bank A compounded annually EAR 1 rn n 1 where r i... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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