Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Consider two riskless perpetuities: (i) pays $120 every year; (ii) pays $10 every month. If the rates of returns of the two perpetuities are the same, investors must buy perpetuity (ii) because it makes more interest payments.
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- 5. Present value of annuities and annuity payments The present value of an annuity is the sum of the discounted value of all future cash flows. You have the opportunity to invest in several annuities. Which of the following 10-year annuities has the greatest present value (PV)? Assume that all annuities earn the same positive interest rate. An annuity that pays $500 at the beginning of every six months An annuity that pays $1,000 at the end of each year An annuity that pays $500 at the end of every six months An annuity that pays $1,000 at the beginning of each year You bought an annuity selling at $2,867.74 today that promises to make equal payments at the beginning of each year for the next twelve years (N). If the annuity's appropriate interest rate (1) remains at 9.50% during this time, then the value of the annual annuity payment (PMT) is $375.00 You just won the lottery. Congratulations! The jackpot is $35,000,000, paid in twelve equal annual payments. The first payment on the…arrow_forwardConsider a perpetuity with a coupon of 100. Imagine that the perpetuity is purchased at time t when the market interest rate is equal to 5%. Furthermore, imagine that the coupon income is taxed at 40% and that capital gains are taxed at 20%. What is the after tax rate of return if the perpetuity is sold at time t+1 when the market interest rate continues to be equal to 5%? 0% O 2% 5% None of the abovearrow_forwardSuppose the risk - free interest rate is 4.2%.a. Having $200 today is equivalent to having what amount in one year?b. Having $200 in one year is equivalent to having what amount today?c. Which would you prefer, $200 today or $200 in one year? Does your answer depend on when you need the money? Why or why not?a. Having $200 today is equivalent to having what amount in one year?Having $200 today is equivalent to having Sin one year. (Round to the nearest cent.)arrow_forward
- 1.arrow_forwardYou are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT? a. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. b. The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. c. The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. d. The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. e. If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.arrow_forward(Related to Checkpoint 5.6) (Solving for) You are considering investing in a security that will pay you $4,000 in 31 years. a. If the appropriate discount rate is 10 percent, what is the present value of this investment? b. Assume these investments sell for $2,062 in return for which you receive $4,000 in 31 years. What is the rate of return investors earn on this investment if they buy it for $2,062? C a. If the appropriate discount rate is 10 percent, the present value of this investment is $. (Round to the nearest cent.)arrow_forward
- Consider a stream of cash flows, where you receive $2,000.00 per year for 20 yearsEXCEPT year 12 during which you receive only $1,000.00. If the current market rate ofinterest is 7.200% (compounded annually), then what is the present value of this stream ofuneven cash flows? Hint: there are several ways to solve this problem but see if you cansolve it using a single annuity formula.arrow_forwardYour friend is analyzing a perpetuity that is slightly different from those you've encountered before. Your friend's possible investment pays $3,100 annually but the payments being immediately. The appropriate rate of return for the risk is 9% What is the market value of this contract (round to the nearest dollar)?arrow_forward
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