Suppose a government is making a series of payments to another government, up to the end of 2039. ·        The first payment is made on 1 January 2021, and is equal to $700,000; ·        All subsequent payments are made on the first of each quarter, but increasing at an inflation rate r, of r = 1.5% every 12 months (effective). ·        That is, the payments on 1 April 2021, 1 July 2021, 1 October 2021 are also $700,000 each, but all payments made in 2022 are $700,000(1+r) each, all payments made in 2023 are $700,000(1+r)2 each, and so on. (a) Assuming an interest rate of 12% per annum (effective), what is the present value of the above payments as at 1 October 2020?

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
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Suppose a government is making a series of payments to another government, up to the end of 2039.

·        The first payment is made on 1 January 2021, and is equal to $700,000;

·        All subsequent payments are made on the first of each quarter, but increasing at an inflation rate r, of r = 1.5% every 12 months (effective).

·        That is, the payments on 1 April 2021, 1 July 2021, 1 October 2021 are also $700,000 each, but all payments made in 2022 are $700,000(1+r) each, all payments made in 2023 are $700,000(1+r)2 each, and so on.

(a) Assuming an interest rate of 12% per annum (effective), what is the present value of the above payments as at 1 October 2020?

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