Q. Suppose there are two assets that you have the Choice over to buy now. Asset
ID: 1154443 • Letter: Q
Question
Q.
Suppose there are two assets that you have the Choice over to buy now. Asset One Costs 100,000 dollars, and Asset 2 costs 90,000 now. Both the assets grow at the rate of 6% per year, however, Asset One matures in 5 years and pays the original plus the accumulated sum with interests in arrears for the past five years, and Asset 2 matures in 3 years, and pays the principal plus the accumulated sum with interests in arrears at the time of the maturity.
A. Asset One is the better one
b. Asset 2 is the better choice
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from the last question
* Internal Rate of Return: the interest rate that equates the present value of an investment with its cost
a. True ----; b. False ---
* The value of a bond varies inversely with the interest rate used to calculate the present value of the promised payment . Explain Why?
* Nominal Interest Rates (i) refers to the interest rate expressed in current-dollar terms. However, the real Interest Rates (r) represents the inflation adjusted interest rate.
EXPLAIN UNDER WHAT CONDITION THEY ARE SAME.
* The fisher equation state the nominal interest rate you agree on (i) must be based onexpected inflation (pe) over the term of the loan plus the real interest rate you agree on (r).
i = r + pe
Based on this equation where would you expect nominal interest to be higher? Brazil Or USA?
Why?
Suppose there are two assets that you have the Choice over to buy now. Asset One Costs 100,000 dollars, and Asset 2 costs 90,000 now. Both the assets grow at the rate of 6% per year, however, Asset One matures in 5 years and pays the original plus the accumulated sum with interests in arrears for the past five years, and Asset 2 matures in 3 years, and pays the principal plus the accumulated sum with interests in arrears at the time of the maturity. A. Asset One is the better one b. Asset 2 is the better choice Show work 12. Internal Rate of Return: the interest rate that equates the present value of an investment with its cost a. True b. False 13. The value of a bond varies inversely with the interest rate used to calculate the present value of the promised payment. Explain Why? 14. Nominal Interest Rates().refers to the interest rate expressed in current-dollar terms. However, the real Interest Rates (r) represents the inflation adjusted interest rate. . EXPLAIN UNDER WHAT CONDITION THEY ARE SAME. '15. The fisher equation state the nominal interest rate you agree on () must be based orn expected inflation ( ) over the term of the loan plus the real interest rate you agree on (r). Based on this equation where would you expect nominal interest to be higher? Brazil Or USA? Why?Explanation / Answer
Ans 1
After 5 years 100000(1.06)^5 value of 1st asset and after 3 years 90000(1.06)^3
Hence 100000(1.06)^5>90000(1.06)^3
Asset 1 is better choice
Ans 2
IRR is interest rate that equats present value of investment to cost
Ans 3
Value of bond is inversely related to interest rate because P=C/(1+r)
As r increase P decrease and vice versa
Ans 3
Nominal rate equals real rate when inflation rate is zero
Ans 4
I=r +pe
For Brazil pe will be higher than USA
Hence Interest rate for Brazil will be higher than USA
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