Question

Question Completion Status: Cash flows occurring in different periods should not be compared unless: interest rates are expected to be stable. the flows occur no more than one year from each other, high rates of interest can be earned on the flows. the flows have been discounted to a common date. QUESTION 5 Store ABC is offering free credit on purchases of over $1,000. You observe that a television can be purchased for nothing down and $4,000 due in one year. Store XYZ offers an identical television for $3,650 but does not offer free credit. Which statement below best describes the real cost of "free" credit? Hint: Find the implied interest rate (like CAGR) assuming PV price at Store XYZ and FV = price at Store ABC. The "free" credit costs about 8.75% The "free" credit costs about 9.13%. The "free" credit costs about 9.59%. "free" credit effectively costs zero percent. QUESTION 6 A corporation has promised to pay $1,000 twenty years from today for each bond sold now. No interest will be paid on the bonds during the twenty years, and the bonds are said to offer a 7% interest rate. Approximately how much should an investor pay for each bond? $70.00 $258.42 $629.56 $857.43 Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Ar

Answer 1

4) Cash flows occuring in different periods should not be compared unless

Ans:- the flows have been discounted to a common date

Last option is correct because Cash flows of different period should be converted to present value for comparing, for which it is discounted to a common date.

5) Given :- Television can be purchased in store ABC with free credit for- $4000 due in one year.

Television can be purchased in store XYZ without free credit for - $3650

Required:- the real cost of free credit

Compute implied interest rate :-

(PV = Price at store XYZ (beggining value), FV = Price at store ABC (ending Value) and t = number of years = 1 year)

=   

=

= 1.0959 - 1

=.0959 = 9.59%

$\therefore$ The free credit cost about 9.59% - Third option is correct

6) Given :- $1000 is paid after 20 years for one bond without any interest. Interest rate = 7%

Required - Amount paid by the investor to purchase the bond

The bond is zero coupon bond as no interest is paid.

The value of bond now =   $F/({1+r})^{n}$

F = face value of the bond = $1000

r = rate of interest = .07

t = time till matrity = 20 years

=

1000/(1+.07) 2

=

=$258.42

$\therefore$ Investor should pay $258.42 for each bond and second option is correct.