Section A: A recap on the interest rates

1) If you borrow RM10, 000 for 5 years as a simple loan, how much you should return after 5
years if your required rate of return is 8%?

FV= PV X (1 + i) n

FV = 10, 000 (1 + 0.08) 5

FV = RM14, 693.28

2) A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If
the first payment is made immediately, what is this grand prize really worth? Use a discount
rate of 6%.

3) For liquidity purposes, a client keeps $100,000 in a bank account. The bank quotes a stated
annual interest rate of 7 percent. The bank's service representative explains that the stated
rate is the rate one would earn if one were to cash out rather than invest the interest
payments. How much will your client have in his account at the end of one year, assuming
no additions or withdrawals, using the following types of compounding?
A. Quarterly

100,000 (1+0.07/4)4

= 107,185.90

B. Monthly
4) You found an investment project that will pay you and your heirs $1,000 per year forever. If
the required return on this investment is 8 percent, how much will you pay for the policy?

1000/0.08 = 12,500

5) You are considering investing in two different instruments. The first instrument will pay nothing
for three years, but then it will pay $20,000 per year for four years. The second instrument will pay
$20,000 for three years and $30,000 in the fourth year. All payments are made at year-end. If your
required rate of return on these investments is 8 percent annually, what should you be willing to pay
for?

A. The first instrument

B. The second instrument (use the formula for a four-year annuity)

Section B
8 .a) what factors can shift the demand for and/or supply of bonds?
8 .b) Using supply and demand curves show how these factors can influence the interest rate
changes.
9) Explain the changes in the interest rate due to a business cycle expansion using the theory of
portfolio choice.

10) Using supply and demand curves explain the fisher effect.