Q1： If you put up $10,000 today in exchange for a 7.

5 percent, 12-year annuity, what

will the annual cash flow will be?

1
1−
(1 + 𝑟)𝑡
𝑃𝑉 = 𝐶 ∗ { }
𝑟

PV=$10000
r=7.5%
t=12
1
1−(1+0.075)12
Then, 10000 = 𝐶 ∗ { 0.075
} , C≈$1292.78

Q2: Bob’s Life Insurance Co. is trying to sell you an investment policy that will pay you
and your heirs $1,000 per year forever. If the required rate of return on this investment
is 12 percent, how much will you pay for the policy?

This problem is about the valuation of a perpetuity. A perpetuity is a financial instrument that
pays a fixed amount forever.
𝐶 1000
𝑃𝑉 = = ≈ $8333.33
𝑟 0.12

Q3：You want to buy a new sports coupe for $43,950, and the finance office at the
dealership has quoted you a 14.3 percent APR (Annual Percentage Rate) loan for 60
months to buy the car. What will your monthly payments be? What is the effective
annual rate on this loan?

Set：
M：Monthly Payment
r：Monthly Rate=0.143/12≈0.011916
[(1 + 𝑟)𝑛 − 1]
𝑃𝑉 = 𝑀 ∗ { }
𝑟(1 + 𝑟)𝑛
1.01191660 −1
43950 = 𝑀 ∗ [0.011916∗1.01191660 ] M≈$1029.274

𝐸𝐴𝑅 = (1 + 𝑟)12 − 1 = 1.01191612 − 1 ≈ 15.25%

Q4 ： Royal Bank charges 7.5 percent compounded quarterly on its business loans.
Dominion Bank charges 8.0 percent compounded semiannually. As a potential borrower,
which bank would you go for a new loan?

Royal Bank compounded Quarterly， n=4；

Dominion Bank compounded Semiannually， n=2；

For Royal Bank：

0.075 4
𝐸𝐴𝑅 = (1 + ) − 1 ≈ 7.71%
4

For Dominion Bank：

0.08 2
𝐸𝐴𝑅 = (1 + ) − 1 ≈ 8.16%
2

Compare with the two banks, as a potential borrower, choose Royal Bank.

Q5.

Coupon: 5€
FV=Par=100€
r=6%
t=10

5 5 (100+5)
Then the bond’s 𝑃𝑉 = (1+0.06)1 + (1+0.06)2 + ⋯ + (1+0.06)10 ≈ 92.65€