1. A riskless zero-coupon (no intermediate/periodic coupon payments) bond that will pay $1,000 in 10 years is selling today for $350. What implied rate of return does the bond offer?
2. In 1880 five aboriginal trackers were each promised the equivalent of 100 Australian dollars for helping to capture the notorious outlaw Ned Kelley. In 1993 the granddaughters of two of the trackers claimed that this reward had not been paid. The Victorian prime minister stated that if this was true, the government would be happy to pay the $100. However, the granddaughters also claimed that they were entitled to compound interest. How much was each entitled to if the interest rate was 8%?
3. You deposit $10,000 in your bank account. If the bank pays 3% compound interest, how much of your earnings will be interest on interest after 10 years?
4. You will need $720 in 4 years. If you earn 3% interest on your funds, how much will you need to invest today in order to reach your savings goal?
5. If you earn 5% per year on your bank account, how long will it take to double your money?
a. not enough information
b. 14.2 years
c. 5 years
d. 10.4 years
6. In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $20,000 and the interest rate is 10%, the borrower “pays” 0.10 × $20,000 = $2,000 immediately, thereby receiving net funds of $18,000 (=$20,000-$2,000) and repaying $20,000 in a year. What is the implied rate on this loan?
7. A company has the following investment decision to make: Project A and B will require the same amount of initial investment (say $90,000). The company can only take on one project. A generates a revenue of $100,000 (for sure) at the end of this year. B generates revenue of $150,000 (for sure) in 6 years. Ignore inflation. Higher discount rate makes the management more likely to choose which project?