Question: a) Explain the key differences between Compounding Interest Rate and Discounting Interest rate? (2 marks) b) You have just bought yourself a house. The bank

a) Explain the key differences between Compounding Interest Rate and Discounting Interest rate? (2 marks) b) You have just bought yourself a house. The bank has offered you a mortgage based on the following terms: (5 marks) Option A. Pay 1800 a year (starting next year) for 20 years Option B. Pay 2000 a year (starting next year) for 15 years Which option would you prefer if your discount rate is 5%? c) What is the future value in 5 years of 1,000 invested in an account with a stated annual interest rate of 10%? (8 marks) Compounded annually? (ii) Compounded semi-annually? (iii) Why does the future value increase as the compounding period shortens (Short answers)? d) What is the PV of a real cash flow of 20,000 in 6 years if the nominal rate of interest is 7% and the general rate of inflation is 2%

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