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Tutorial 04 Questions

The document contains solutions for a finance tutorial focusing on present value, discount rates, and investment decisions. It includes calculations related to savings bonds, loan amounts based on interest rates, and comparisons between cash flow options from a lottery prize. Key concepts explored include the impact of interest rates on investment valuations and decision-making based on expected returns.

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2 views1 page

Tutorial 04 Questions

The document contains solutions for a finance tutorial focusing on present value, discount rates, and investment decisions. It includes calculations related to savings bonds, loan amounts based on interest rates, and comparisons between cash flow options from a lottery prize. Key concepts explored include the impact of interest rates on investment valuations and decision-making based on expected returns.

Uploaded by

emellyzhi.au
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

FINA1221- Introduction to Finance

Tutorial 4- Solutions
Week-Five
1. What happens to the present value of a cash-flow stream when the discount rate
increases? Place this in the context of an investment. If the required return on an
investment goes up but the expected cash flows do not change, would you be willing
to pay the same price for the investment or would you pay more or less for this
investment than before interest rates changed?

2. A state savings bond from New South Wales can be converted to $100 at maturity
six years from purchase. If the state bonds pay 8% annual interest (compounded
annually), at what price must the state sell its bonds? Assume no cash payments on
savings bonds before redemption.

3. You expect to have $1000 in one year. A bank is offering loans at 6% interest per year.
How much can you borrow today?

4. A friend asks to borrow $55 from you and in return will pay you $58 in one year.
Your bank is offering a 6% interest rate on deposits and loans.
a. How much would you have in one year if you deposited the $55 instead?
b. How much could you borrow today if you pay the bank $58 in one year?
c. Should you loan the money to your friend or deposit it in the bank?

5. Assume that you just won the lottery. Your prize can be taken either in the form of
$40,000 at the end of each of the next 25 years (i.e., $1 million over 25 years) or as
a lump sum of $500,000 paid immediately.
a. If you expect to be able to earn 5% annually on your investments over the next
25 years, which alternative should you take? Why?
b. Would your decision in part (a) be altered if you could earn 7% rather than 5 %
on your investments over the next 25 years? Why?
c. At approximately what interest rate would you be indifferent when choosing
between the two plans?

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