Question 1: Which would you prefer?
a) An investment paying interest of 12% compounded annually.
b) An investment paying interest of 11.7% compounded semiannually.
c) An investment paying 11.5% compounded continuously.
Work out the value of each of these investment after 1,5, and 20 years.
Question 2. You own a pipeline which will generate a $2 million cash return over the coming year. The pipeline's operating costs are negligible, and it is expected to last for a very long time. Unfortunately, the volume of oil shipped is declining, and cash flows are expected to decline by 4% per year. The discount rate is 10%.
a. What is the PV of the pipeline's cash flows if its cash flows are assumed to last forever?
b. What is the PV of the cash flows if the pipelines is scrapped after 20 years?
Question 3. A 10-year German government bond (bund) has a face value of 100 and an annual coupon rate of 5%. Assume that the interest rate (in euros) is equal to 6% per year. What is the bond's PV?
Question 4. Look again at problem 3. Suppose that the German bund paid interest semiannually like a U.S. bond. ( The bond would pay .025x100= 2.5 every six months). What's the PV in this case?