1. Perpetuity If an investment policy pays you $25,000 per year forever and you require 6% p.a. return on this investment, how much will you pay for this policy? What about a policy that pays $30,000 per year? 2. EAR Calculate the EAR in the following ca

1. Perpetuity

If an investment policy pays you $25,000 per year forever and you require 6% p.a. return on this investment, how much will you pay for this policy? What about a policy that pays $30,000 per year?

2. EAR

Calculate the EAR in the following cases:

Hint: Use the EFFECT function in Excel.

3. APR

Find the APR for each of the following cases:

Hint: Use the NOMINAL function in Excel.

4. Present Values

Calculate the present values for the two following cash flows:

5. Annuity and Perpetuity

You are going to receive a 30-year annuity of $105,000. Your friend, Nancy, is going to receive a perpetuity of $105,000. If the appropriate interest rate is 7% p.a., how much more is Nancy's cash flow worth than yours?

6. Comparing Cash Flows

You've just joined a new firm. They offered you two different salary arrangements:

A. $6,100 per month for the next two years.

B. $4,800 per month for the next two years, plus a $25,000 signing bonus.

If the interest rate is 7% p.a., which arrangement do you prefer?

7. Future Values

Assuming an interest rate of 6.9% p.a., what is the future value of the following cash flows five years from now? What is the future value 10 years from now?

8. Future Values

An insurance company is offering a new policy. The parent makes the following six payments to the insurance company, and no more payments after child's sixth birthday. When the child reaches age 65, he/she receives $350,000. If the interest rate is 10% for the first 6 years, and 7% for all subsequent years, is the policy worth buying?