2. EWhat istrocess of taking an expected future value and determining the presen

Question

2. EWhat istrocess of taking an expected future value and determining the present value? Explain the Rule of 72 4. What is an annuity? 5. Explain the difference between an ordinary annuity and an annuity due. 6. How do you handle an annuity due on a financial calculator? 7. What is a perpetuity? 8. If a series of cash flows with quarterly payments has an effective annual rate of 6.42, what does this mean? Chapter 6 Interest Rates 1. What is the expected relationship between an increase in inflation and the expected 0 increase in the interest rate? 2. What does the default risk premium depend on? 3. Which factors go into determining the liquidity premium? 4. Would the maturity risk premium be different for different bonds issued by the same company? Why? 5. What does r*+IP equal? 6. Which premiums would a short-term treasury security include? (i.e. IP, DRP, LP, MRP) 2 8. When is a yield curve inverted? 9. What does the Liquidity Preference Theory suggest about the yield curve? 10. How does the Federal Reserve Bank and its influence on monetary policy affect interest rates? 11. An increase in interest rates will likely lead to a in business activity Chapter 7 Bonds

Explanation / Answer

1.

The process when present value amount grow to future value amount is called compounding.

2.

the process of taking future value amount and determine present value using future vale amount is called discounting

3.

Rule of 72 states that if mutiplication of number of year and interest rate is 72 then it take the number of year to double amount at given interest rate. Suppose interest rate is 12% then in 6 year (72 / 12) any amount will be double.

4.

annuity is defined as a series of payment for limited period of time. example. Saving $500 per month for next 20 year.

5.

Ordinary annuity is series of payment in which all payment is made at end of the period. in annuity due all payment is made at begining of the period.

6.

In financial calculation calculate present value of annuity for one less than given period. example, if an annuity has 10 payment then calculate present value for 9 period in financial calculator and add one annuity payment in present value to determine present value of annuity due.

7.

Perpetuity is series of payment which life is infinite. perpetuaty is type of annuity but the payment is made in perpetuity is not limite, that is payment is made for infinite period.

8.

Payment is made quarterly so here annuity is quarterly payment annuity. in one year total four payment will be made. since payment is made quarterly, so amount is compound more than once in a year. So annual percentage return must be converted in effective annual rate.

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