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Question 2 (14 marks) Grace is considering selling all of her holding of stocks and putting the money into a bank account. After checking out three banks, she obtained the following information: i) Bank A a/c: 24% APR with annual compounding ii) Bank B a/c: 22% APR with semi-annual compounding iii) Bank Ca/c: 24% APR with daily compounding (360 days per year and 30 days per month) Just based on the quarterly return (Effective Quarterly Rate) of the accounts, which one would Grace prefers the most and which one the least? Answer with 2 decimal places in percentage. Question 3 (12 marks) Consider the following infinite series of cash flows, of which alternate cash flows of $9 and $5 take place between t=2 and t=26. All other cash flows, including those at t=0, t=1 and from t=27 onwards are $5 per year (with the only except of Year 47, at which the cash flow is $1). Time(yr.) 0 1 2 3 4 5 ... 25 26 27 28 ... 45 46 47 48 49 ... CF $5 $5 $9 $5 $9 $5 ... $5 $9 $5 $5 ... $5 $5 $1 $5 $5 ... Suppose the effective annual rate is 5%. a) Calculate the present value (at t=0) of this cash flow series. [Hints: (1) What is the (effective) 2-year rate (E2YR)? (2) Can assume the \"basic\" cash flows are $5 each year.] b) Is it possible to find the future of this cash flow series? Explain. (2 marks) 2

          Question 2 (14 marks)
Grace is considering selling all of her holding of stocks and putting the money into a bank account.
After checking out three banks, she obtained the following information:
i) Bank A a/c: 24% APR with annual compounding
ii) Bank B a/c: 22% APR with semi-annual compounding
iii) Bank Ca/c: 24% APR with daily compounding (360 days per year and 30 days per month)
Just based on the quarterly return (Effective Quarterly Rate) of the accounts, which one would Grace
prefers the most and which one the least? Answer with 2 decimal places in percentage.
Question 3 (12 marks)
Consider the following infinite series of cash flows, of which alternate cash flows of $9 and $5 take
place between t=2 and t=26. All other cash flows, including those at t=0, t=1 and from t=27 onwards
are $5 per year (with the only except of Year 47, at which the cash flow is $1).
Time(yr.) 0 1 2 3 4 5 ... 25 26 27 28 ... 45 46 47 48 49 ...
CF $5 $5 $9 $5 $9 $5 ... $5 $9 $5 $5 ... $5 $5 $1 $5 $5 ...
Suppose the effective annual rate is 5%.
a) Calculate the present value (at t=0) of this cash flow series.
[Hints: (1) What is the (effective) 2-year rate (E2YR)? (2) Can assume the \"basic\" cash flows
are $5 each year.]
b) Is it possible to find the future of this cash flow series? Explain.
(2 marks)
2

Question 2 (14 marks)
Grace is considering selling all of her holding of stocks and putting the money into a bank account.
After checking out three banks, she obtained the following information:
i) Bank A a/c: 24% APR with annual compounding
ii) Bank B a/c: 22% APR with semi-annual compounding
iii) Bank Ca/c: 24% APR with daily compounding (360 days per year and 30 days per month)
Just based on the quarterly return (Effective Quarterly Rate) of the accounts, which one would Grace
prefers the most and which one the least? Answer with 2 decimal places in percentage.
Question 3 (12 marks)
Consider the following infinite series of cash flows, of which alternate cash flows of 9 and5 take
place between t=2 and t=26. All other cash flows, including those at t=0, t=1 and from t=27 onwards
are 5 per year (with the only except of Year 47, at which the cash flow is1).
Time(yr.) 0 1 2 3 4 5 ... 25 26 27 28 ... 45 46 47 48 49 ...
CF 55 95 95 ... 59 55 ... 55 15 5 ...
Suppose the effective annual rate is 5%.
a) Calculate the present value (at t=0) of this cash flow series.
[Hints: (1) What is the (effective) 2-year rate (E2YR)? (2) Can assume the b̈asicc̈ash flows
are5 each year.]
b) Is it possible to find the future of this cash flow series? Explain.
(2 marks)
2

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