Exam 5: Time Value of Money

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Your father paid $10,000 (CF at t = 0)for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,250 at the end of the 5th year.What is the expected rate of return on this investment?

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If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

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Sam was injured in an accident,and the insurance company has offered him the choice of $24,000 per year for 15 years,with the first payment being made today,or a lump sum.If a fair return is 7.5%,how large must the lump sum be to leave him as well off financially as with the annuity?

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