 Mathematical Finance Questions

Subject Business Mathematical Finance

Question

PROBLEM 1:

You have just purchased merchandise for \$1400. However , the vendor will give you a 3% discount , IF you pay the requested amount ( 97% of \$1400) within 30 days ( let’s call that ONE MONTH ) . SO, you go to your bank and request a loan for \$1358.You will return the \$1358 to the bank, WITH interest, at the SIMPLE INTEREST rate of 12%, in exactly 30 days time. Please determine your overall rate of return on your investment, for that one month time span.

PROBLEM 2:

A couple wins 10,000 in a lottery and wishes to invest it at 10% simple interest to produce equal amount of money for each of their 2 children, now ages 11 and 16 when the children reach of age 21. What is the amount each child will get? Put the focal date at 10 years from now.

PROBLEM 3:

Debts of 500 and 1500 are due in 3 and 6 months, respectively. What cash settlement will settle these debts if it is based on an interest rate 10% and the time of the cash settlement is used the focal date.
NOTE; The phrase “CASH SETTLEMENT” means paying cash IMMEDIATELY. Please consider problem (2B) as a THREE part problem:
i. Answer the question as listed in the text book.
ii. Find the NET PRESENT WORTH (NPW) of the investment at r = 10%, if the cash settlement is to be \$1850.
iii. What does the SIGN of your response to (ii) suggest about the INTERNAL RATE OF RETURN (IRR) of the overall investment, Compared to 10% ? BRIEFLY EXPLAIN WHY.

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PROBLEM 2:

Ten years from now, the investment will amount to 10,000+10*10%*10,000=20,000. Hence in 10 years time, each of the children will get 10,000....

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