Assume that you are nearing graduation and have applied for a job at a prestigious com-pany. The company’s evaluation process requires you to take an examination that covers several financial analysis techniques. The first section of the test addresses discounted cash flow analysis. See how you would do by answering the following questions.
f. (1) What’s the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10%?
(2) What’s the present value of the annuity? (3) What would the future and present values be if the annuity were an annuity due?
g. What is the present value of the following uneven cash flow stream? The appropriate interest rate is 10%, compounded annually.
01234 0100
10% 300300 h. (1) Define the nominal rate (INOM quoted rate. Also define the periodic rate (IPER
is compounded quarterly, what is the periodic rate (IPER monthly?
–50
), which also is called the stated rate and the ). If the nominal rate is 6% and )? If it is compounded
(2) If the stated interest rate is constant, will the future value be larger or smaller if we compound an initial amount more often than annually (for example, semi-annually)? Why?
(3) What is the future value of $100 after 5 years under 12% annual compounding? Semiannual compounding? Quarterly compounding? Monthly compounding? Daily compounding?
(4) What is the effective annual rate (EFF%), also called the annual equivalent rate (AER)? What is the EFF% for a nominal rate of 12%, compounded semiannu-ally? Compounded quarterly? Compounded monthly? Compounded daily? (5) Can the effective annual rate ever be equal to the nominal (quoted) rate?