IEOR E4003 Industrial Economics
Professor Soulaymane Kachani
Class Exercise 1:
Find the effective interest rate per quarter at a nominal rate of 18% compounded a- Quarterly b- Monthly c- Continuously
Class Exercise 2:
Suppose we are in the market for a medium-sized used car. We have surveyed the dealers’ advertisements in the newspaper and have found a car that should fulfill our needs. The asking price for the car is $7,500, and the dealer proposes that we make a $500 down payment now and pay the rest of the balance in equal end-month payments of $194.82 each over a 48-month period. Consider the following situations.
1. Instead of using the dealer’s financing, we decide to make a down-payment of $500 and borrow the rest from a bank at 12% compounded monthly. What would be our monthly payment to pay off the loan in 4 years?
2. We are going to accept the dealer’s offer but we want to know both the monthly APR and the EAR that the dealer is charging.
Class Exercise 3:
Find the future value of the following cash profile: n 0 1 2 3 4 5 6 7 8
Fn 0 100 106 112 118 124 130 136 142 i ==10%
Class Exercise 4:
A mining company is concerned about the increasing cost of diesel fuel for their mining operation. A special piece of mining equipment, a tractor-mounted ripper, is used to loosen the earth in open-pit mining operations. The company thinks that the diesel fuel consumption will escalate at the rate of 10% per year as the efficiency of the equipment decreases. The company’s records indicate that the ripper averages 18 gallons per operational hour in year 1, with 2,000 hours of operation per year. What would be the present worth of the cost of fuel for this ripper for the next five years if the interest rate is 15% compounded annually?
Class Exercise 5:
A series of equal quarterly payments of $1,000 extends over a period of 5 years. What is the
present
d. An account that pays 10% nominal interest with annual compounding. e. An account that pays 10% nominal interest with daily compounding. RIGHT ANSWER | 2.(Points: 1) | | Suppose someone offered you the choice of two equally risky annuities, each paying $10,000 per year for five years. One is an ordinary (or deferred) annuity, while the…
pays its principal of 100. Assume semi-annual compounding. Half Year 1 2 3 4 5 n Bond A Bond B .95 .91 .87 .80 .70 10 10 10 10 110 5 5 5 5 105 A. Calculate the price of each bond assuming there are no arbitrage opportunities in the market. (That is, calculate the…
principle (+interest or –payments) Annuity Equal payments at equal intervals for a given period Perpetuity Equal payments at equal intervals to perpetuity Effective Annual Interest Rate Changing rate with non-annual compounding periods to an annual rate with annual compounding periods Debt & Valuation Parties Acceptor (guarantee) Drawer (takes funds, issues debt) Discounter (buys debt @ discount) Short term debt Period is less than one year No explicit interest paid (interest is the difference…
two strategies and analysis the reason of the result. Arbitrage, Delta neutral Strategy 1) Defined the Mispriced option Options are derivatives of the underlying assets, their value will be influenced by the current stock price, the exercise price, the time to maturity, interest rate and the most important, the volatility, which indicates how much the stock will change. According to the c, the option’s value is positive related to the volatility and the implied volatility which measures…
second year and so on. I have selected the formulas to solve the exercises after I have thought about what exercise what sequence is. Since in the exercise with the CB radio tower the costs were always $ 25 more for every 10 feet I used the formula for arithmetic sequences. It was always x + $ 25. So it is an arithmetic sequence. The other exercise includes a geometric sequence since always 5% annual interest is added that is compounding yearly. Already in the second year we start no more with $ 500…
compounded rate is approximately 7.7% , because: e0.0770 = 1.0800 Thus: This result is greater than the answer in Part (c) because the endowment is now earning interest during the entire year. 26. With annual compounding: FV = $100 (1.15)20 = $1,636.65 With continuous compounding: FV = $100 e(0.15×20) = $2,008.55 27. One way to approach this problem is to solve for the present value of: (1) $100 per year for 10 years, and (2) $100 per year in perpetuity, with the first cash flow…
Fixed Income Securities Chapter 2 Basics of Fixed Income Securities Problem Set (light version of the exercises in the text) Q3. You are given the following data on different rates with the same maturity (1.5 years), but quoted on a different basis and different compounding frequencies: • Continuously compounded rate: 2.00% annualized rate • Continuously compounded return on maturity: 3.00% • Annually compounded rate: 2.10% annualized rate • Semi-annually compounded rate: 2.01% annualized…
its holder the right to buy or sell a specified asset at a fixed price on or before a fixed date. – European option vs. American option • Buyer (holder) has the long position and seller (writer) has the short position. • Key terminology – Exercise or strike price – Maturity or expiration – Premium or price 3 Options Contracts 4 Options trading • Call option vs. Put option • Standardised contracts are supervised and guaranteed by the Clearing House. • As discussed later…
company because they have the right to purchase the new-issue shares before they are available in the open market. Second advantage is that the rights offering price is usually at discount to the current market price. Shareholders that do not want to exercise their right can sell their right on the open market. New shares MOC have to issue: Number of rights required to purchase each new share: i) Theoretical value of a right: Share price during the ex-rights period: Value of the right during the…
medical purposes, the federal government eventually will have to respond appropriately. The clock is ticking--how long will the tail continue to wag the dog? The war on marijuana has already passed the point of diminishing return and is a costly exercise in futility. While most agree on the…