Question: Two payment plans are considered. Plan A pays $100 immediately, $200 in 2 years and $100 in 3 years. Plan B simply pays $350 immediately.

Two payment plans are considered. Plan A pays $100 immediately, $200 in 2 years and $100 in 3 years. Plan B simply pays $350 immediately.

(a) (1 marks) Compare the present values of Plan A and Plan B at 7.8% and 8.5% eective interest rate per year.

(b) (2 marks) Assume Plan A is purchased for $350 at the time of the rst payment.

Prove the existence of a unique yield rate which lies between 7.8% and 8.5%.

(c) (2 marks) Using a single iteration of linear interpolation between 7.8% and 8.5%, nd an approximate yield rate.

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