Chapter 2

The Time Worth of Money

and Net Present Value

Methods to Questions installment payments on your 1 to 2. 43 appear in the text.

2 . 44What is a perfect market? What had been the assumptions made in this chapter that have been not section of the perfect market scenario?

Answer: A great market is one particular with no taxes, no purchase costs, zero differences in thoughts and opinions, and many sellers and buyers. In this phase, we are also assuming simply no uncertainty with out inflation.

installment payments on your 45What are the differences between a bond and a loan?

Response: No difference really. A bond is a loan.

2 . 46In the text, I thought you received the dividend at the end from the period. In the real world, in case you received the dividend at the outset of the period instead of the end of the period, can this change your effective level of go back? Why?

Response: Yes, because dividends could then be reinvested and earn extra returns themselves.

*2. 47Your stock costs $100 today, pays $5 in returns at the end from the period, then sells intended for $98. What is your rate of return?

Answer: ($98 & $5)/$100 в€’ 1 ' 3%.

2 . 48The rate of interest has just increased from 6% to 8%. How a large number of basis factors is this?

Answer: 200 basis points.

*2. 49Assume home finance loan of 10% per year. Simply how much would you drop over your five years if you had to quit interest for the interestвЂ”that is usually, if you received 50% instead of compounded interest?

Answer: You would probably lose 14. 1%.

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2 . 50Over 20 years, will you prefer 10% per annum, with interest compounding, or 15% per annum yet without curiosity compounding? (That is, you get the interest, but it is put into an account that earns zero interest, which is what we call simple interest. )

Answer: 20+ years, you would probably receive a level of return of 1. one hundred twenty в€’ one particular ( 573%. The uncompounded rate earns 15% ( 20 ' 300%. You would probably prefer the compounded lower interest.

*2. 51A project came back +30%, in that case в€’30%. Hence, its arithmetic average price of go back was 0%. If you invested $25, 1000, how much would you end up with? Is your rate of return confident or adverse? How would your overall level of go back have been different if you first earned в€’30% and then +30%?

Solution: The rate of return is usually (1 + 30%) ( (1 в€’ 30%) в€’ 1 ' в€’9%. You will end up with $25, 000 ( 0. 91 ' $22, 750. This kind of turns out to be more generalвЂ”the total compounded gross annual rate of return is usually below the math average price of come back. The rate of return may not have transformed if you got first misplaced 30% then gained 30%. The computations would prove the same.

installment payments on your 52A task returned +50%, then в€’40%. Thus, their arithmetic average rate of return was +5%. Is your charge of returning positive or perhaps negative?

Solution: The rate of return can be (1 + 50%) ( (1 в€’ 40%) в€’ 1 ' в€’10%. You would probably lose money with this negative rate of return.

*2. 53An expense for 50 dollars, 000 makes a rate of return of 1% in each month of a full 12 months. How much money are you going to have in year's end?

Answer: 50 dollars, 000 ( 1 . 0112 ' $56, 341.

installment payments on your 54There is always disagreement by what stocks are good purchases. The normal degree of disagreement is whether a specific stock will probably offer, claim, a 10% (pessimistic) or maybe a 20% (optimistic) annualized level of return. For a $30 stock today, what does the big difference in perception between those two opinions suggest for the expected inventory price via today to tomorrow? (Assume that there are twelve months in the year. Think about your answer for a moment, and know that a $30 stock commonly moves regarding В±$1 on the typical day. This unexplainable up-and-down volatility is often called noise. )

Response: The daily interest rate will either be 1 . 101/365 в€’ one particular ( zero. 026% or 1 . 201/365 в€’ 1 ( zero. 05%. Hence, the pessimist expects a stock price of $30. 008 tomorrow; the optimist wants a stock selling price of $30. 015 the next day. Note that the 0. 7 cent roughly expected increase is dwarfed by the common $1 daily noise in stock rates.

*2. fifty five If the rate of interest is 5% per...