Finance
- As a winner of a lottery you can choose one of the following prizes:
-£10 million now.
-£15 million at the end of six years.
-£800,000 a year forever, starting in one year.
-£1,500,000 for each of the next ten years, starting in one year. If the discount rate is 8 per cent, which is the most valuable prize? - What is the present value of £50000 to be received in ten years’ time when the interest rate (nominal annual) is 8 per cent and (a) annual discounting is used? (b) semi-annual discounting is used?
- Allan buys a car on hire purchase paying six annual instalments of £4,500, the first being an immediate cash deposit. Assuming an interest rate of 8 per cent is being charged by the hire-purchase company, how much is the current cash price of the car?
- Imagine that the market yield to maturity for five-year bonds in a particular risk class is 8 per cent. You buy a bond in that risk class which offers an annual coupon of 7 per cent for the five years, with the first payment in one year. The bond will be redeemed at par (£100) in five years.
-How much would you pay for the bond?
-How much would you pay for the bond if you think that the company became less risky, and its yield to maturity should be 6 percent?