Question

1)         Currency appreciation: Consider the price of beer. Let's pretend that last year a bottle of beer used to cost one dollar, but this year it costs two dollars per bottle.

                        a)         This means beer costs twice as much as last year, or beer price has gone up by _________%

                        b)         One dollar buys half as much beer as last year; or dollar has fallen in value by ___________%

            Note: The same idea works for relative values of currencies, i.e. appreciation of Yen against the dollar or depreciation of the dollar against the Yen.

2)         Do problem 1 using different data. Last year a bottle of beer used to cost $ 0.50, but this year it costs $ 0.60.

                        a) Beer price has gone up by    _________%

                        b) Dollar has fallen in value by            _________%

3)         Find PV for following cash flows using a discount rate of 10% per period, all periods are of the same (but unspecified) duration.

                                    0_____1_____2_____3_____4

                                                $10      $10      $10      $110

                        a) use a calculator, make sure that you know the procedure.

                                    p/yr=____, N=____, PMT=_____, i=____, FV=_____, PV=_____

                        b) use a spreadsheet, make sure that you know the procedure

                                    Show spreadsheet printout

                        c) use intuition:            PV=_____because ____________________

                                    Hint: Compare coupon rate and discount rate.

                        d) if we use a higher discount rate the PV will be higher/lower

                        e) do part 'a' using the 'cashflow mode' on the calculator.

                                    CF₀ = ____, CF₁ = ____, times = _____, CF₂ = ____,

                                    PV =   ____

Answer 1