You own the right to receive a sequence of payments. The first payment is $4000 and is received today. The second payment is $4500 and is received one year from today. Subsequent payments are received at the beginning of every two years forever (i.e. time 3, time 5, time 7 etc) and each of these payments is 9% larger than the previous one. The annual effective interest rate i = 10%. a) What is the present value of this sequence of payments at time 0? b) What is the minimum value of the annual effect rate i for which an answer to part a) exists? c) Describe in words why there is no solution if i is below this number. d) You wish to exchange this sequence of payments for a single payment of size $55,000. At what time would that payment be received?
You own the right to receive a sequence of payments. The first payment is $4000 and is received today. The second payment is $4500 and is received one year from today. Subsequent payments are received at the beginning of every two years forever (i.e. time 3, time 5, time 7 etc) and each of these payments is 9% larger than the previous one. The annual effective interest rate i = 10%. a) What is the present value of this sequence of payments at time 0? b) What is the minimum value of the annual effect rate i for which an answer to part a) exists? c) Describe in words why there is no solution if i is below this number. d) You wish to exchange this sequence of payments for a single payment of size $55,000. At what time would that payment be received?
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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Transcribed Image Text:You own the right to receive a sequence of payments. The first payment is
$4000 and is received today. The second payment is $4500 and is received one year from today.
Subsequent payments are received at the beginning of every two years forever (i.e. time 3, time
5, time 7 etc) and each of these payments is 9% larger than the previous one. The annual
effective interest rate i = 10%.
a) What is the present value of this sequence of payments at time 0?
b) What is the minimum value of the annual effect rate i for which an answer to part a)
exists?,
c) Describe in words why there is no solution if i is below this number.
d) You wish to exchange this sequence of payments for a single payment of size $55,000. At
what time would that payment be received?
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