4. Present value Finding a present value is the reverse of finding a future value. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future. Which of the following investments that pay will $10,000 in 5 years will have a higher price today? O The security that earns an interest rate of 10.00%. O The security that earns an interest rate of 15.00%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price? O An investment that matures in five years O An investment that matures in six years Which of the following is true about present value calculations? O Other things remaining equal, the present value of a future cash flow increases if the investment time period increases. O Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.
4. Present value Finding a present value is the reverse of finding a future value. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future. Which of the following investments that pay will $10,000 in 5 years will have a higher price today? O The security that earns an interest rate of 10.00%. O The security that earns an interest rate of 15.00%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price? O An investment that matures in five years O An investment that matures in six years Which of the following is true about present value calculations? O Other things remaining equal, the present value of a future cash flow increases if the investment time period increases. O Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![# 10. Perpetuities
Perpetuities are also called **annuities with an extended or unlimited life**. Based on your understanding of perpetuities, answer the following questions.
**Which of the following are characteristics of a perpetuity? Check all that apply.**
- [ ] The value of a perpetuity cannot be determined.
- [ ] A perpetuity is a stream of regularly timed, equal cash flows that continues forever.
- [ ] The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows.
- [ ] A perpetuity is a stream of unequal cash flows.
**A local bank’s advertising reads: “Give us $50,000 today, and we’ll pay you $800 every year forever.” If you plan to live forever, what annual interest rate will you earn on your deposit?**
- ( ) 1.28%
- ( ) 1.60%
- ( ) 2.56%
- ( ) 1.44%
**Oops!** When you went in to make your deposit, the bank representative said the amount of required deposit reported in the advertisement was incorrect and should have read $75,000. This revision, which will __________ the interest rate earned on your deposited funds, will adjust your earned interest rate to __________.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Faf434c73-38f1-4a89-b981-edd99d760c82%2Fa6237ce7-ca6d-4719-a78a-7659cf6baf36%2Fc98238_processed.png&w=3840&q=75)
Transcribed Image Text:# 10. Perpetuities
Perpetuities are also called **annuities with an extended or unlimited life**. Based on your understanding of perpetuities, answer the following questions.
**Which of the following are characteristics of a perpetuity? Check all that apply.**
- [ ] The value of a perpetuity cannot be determined.
- [ ] A perpetuity is a stream of regularly timed, equal cash flows that continues forever.
- [ ] The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows.
- [ ] A perpetuity is a stream of unequal cash flows.
**A local bank’s advertising reads: “Give us $50,000 today, and we’ll pay you $800 every year forever.” If you plan to live forever, what annual interest rate will you earn on your deposit?**
- ( ) 1.28%
- ( ) 1.60%
- ( ) 2.56%
- ( ) 1.44%
**Oops!** When you went in to make your deposit, the bank representative said the amount of required deposit reported in the advertisement was incorrect and should have read $75,000. This revision, which will __________ the interest rate earned on your deposited funds, will adjust your earned interest rate to __________.
![**4. Present Value**
Finding a present value is the reverse of finding a future value.
**[Blank Space for User Input]** is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future.
**Question 1:**
Which of the following investments that pay will $10,000 in 5 years will have a higher price today?
- ○ The security that earns an interest rate of 10.00%.
- ○ The security that earns an interest rate of 15.00%.
**Question 2:**
Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price?
- ○ An investment that matures in five years
- ○ An investment that matures in six years
**Question 3:**
Which of the following is true about present value calculations?
- ○ Other things remaining equal, the present value of a future cash flow increases if the investment time period increases.
- ○ Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Faf434c73-38f1-4a89-b981-edd99d760c82%2Fa6237ce7-ca6d-4719-a78a-7659cf6baf36%2Fgze6i1f_processed.png&w=3840&q=75)
Transcribed Image Text:**4. Present Value**
Finding a present value is the reverse of finding a future value.
**[Blank Space for User Input]** is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future.
**Question 1:**
Which of the following investments that pay will $10,000 in 5 years will have a higher price today?
- ○ The security that earns an interest rate of 10.00%.
- ○ The security that earns an interest rate of 15.00%.
**Question 2:**
Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price?
- ○ An investment that matures in five years
- ○ An investment that matures in six years
**Question 3:**
Which of the following is true about present value calculations?
- ○ Other things remaining equal, the present value of a future cash flow increases if the investment time period increases.
- ○ Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.
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