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    Business Finance

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    Muhammad Shehryar
    This document contains a student's answers to questions from a business finance course. It includes: 1) Calculations to determine how long it will take an initial $2000 investment to grow to $4765 at an annual interest rate of 8% compounded semiannually, and the present value of payments of $100 per year in perpetuity with a 10% discount rate. 2) Explanations of the differences between real and nominal interest rates with an example, and why an investor would prefer securities exchanges over over-the-counter markets. 3) Calculations to find the present value of $40,000 to be received in 15 years with a 10% annual discount rate, and examples each

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    Business Finance

    Uploaded by

    Muhammad Shehryar
    31 views5 pages
    This document contains a student's answers to questions from a business finance course. It includes: 1) Calculations to determine how long it will take an initial $2000 investment to grow to $4765 at an annual interest rate of 8% compounded semiannually, and the present value of payments of $100 per year in perpetuity with a 10% discount rate. 2) Explanations of the differences between real and nominal interest rates with an example, and why an investor would prefer securities exchanges over over-the-counter markets. 3) Calculations to find the present value of $40,000 to be received in 15 years with a 10% annual discount rate, and examples each

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    This document contains a student's answers to questions from a business finance course. It includes: 1) Calculations to determine how long it will take an initial $2000 investment to grow to $4765 at an annual interest rate of 8% compounded semiannually, and the present value of payments of $100 per year in perpetuity with a 10% discount rate. 2) Explanations of the differences between real and nominal interest rates with an example, and why an investor would prefer securities exchanges over over-the-counter markets. 3) Calculations to find the present value of $40,000 to be received in 15 years with a 10% annual discount rate, and examples each

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    31 views5 pages

    Business Finance

    Uploaded by

    Muhammad Shehryar
    This document contains a student's answers to questions from a business finance course. It includes: 1) Calculations to determine how long it will take an initial $2000 investment to grow to $4765 at an annual interest rate of 8% compounded semiannually, and the present value of payments of $100 per year in perpetuity with a 10% discount rate. 2) Explanations of the differences between real and nominal interest rates with an example, and why an investor would prefer securities exchanges over over-the-counter markets. 3) Calculations to find the present value of $40,000 to be received in 15 years with a 10% annual discount rate, and examples each

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    School of Management and Social Sciences (Dept.

    of Business Administration)
    Course Title: Business Finance
    Instructor: Ms. Marium Saleem
    Student name : Baz Muhammad
    Id : 12226
    Q1. (a) Ali deposited $2000 in a savings account. The annual interest
    rate is 8 percent, compounded semiannually. How many years will it
    take for his money to grow to $4765? (5 marks)
    FV=4765
    PV=2000
    k=8% 4%
    N=?
    PV=FV×Pvif(k,N)
    2000=4765×pvif(4%,n)
    2000
    4765
    =pvif(4%,n)

    0.41972718=pvif(4%,n)
    Checking 0.41972 in the present value table 4%
    N=0.419
    N=0.42
    N=22 years
    b) A payment of $100 per year forever is made with a discount rate
    of 10 percent. What is the present value of these payments?
    Answer:
    PMT=100
    I=10 =0.1
    1
    PVP=PMT× 0.1

    PVP=100×10
    1000
    Q2. (a)Briefly explain the difference between real rate of interest
    and nominal interest rate with an example.
    Answer: interest rate is return on the investment or the cost of the
    credit there are two types of interest one is real rate of interest and the
    other is nominal rate of interest
    1. As discussed, previous, the nominal interest rate is the rate of
    return. Interest is earned by charged to the buyer, while the real rate
    of interest is the effective rate which an investor will realize.
    2. The nominal interest rate has no effect of inflation incorporated in
    it while the real interest rate is calculated after removing the inflation
    effect.
    3. Bank interest rates, loan interests, etc. all are nominal interest
    rates. Real interest rates are basically derived from nominal rates.
    4. A real interest rate is basically based on the principle of time value
    of money, inflation, etc. will change the value of money continuously
    with time, this effect will get captured in real rates. No such
    adjustments happen in nominal rates.
    5. A nominal rate cannot be negative and can only go down to 0%
    while the real rate can be negative. For example: If the nominal rate in
    the market is 3% but inflation itself is 5%, effectively, the investor will
    lose money and will have a negative real interest rate.
    b) Being an investor, which market will you prefer, security exchanges
    or over-the-counter market? And why
    being an investor, I will not nut my all the money in one bucket I will
    make a portfolio of different I will invest some in securities and some in
    bonds like the municipal bonds treasury bonds I will also invest in stock
    if I lose in stocks so I can recover that money inn the bonds. In this why
    ii can reduce the risk I can save myself from the lose so don’t put all
    your money in one bucket
    Q3. (a) Calculate the present valve of $40,000 to be received fifteen
    years from now at an annual discount rate of 10 percent. (5 marks)
    FV=40000
    N=15
    K=10%=0.1
    FV
    PV= (1+k )n
    40000
    PV= (1+0.1)15
    40000
    PV= 1.115
    40000
    PV= 4.17724

    PV=9575.70
    (b) Give two daily life examples of ordinary annuity and annuity due
    and briefly explain why they are been categorized as either. (5 marks)
    Answer:
    Annuity due : when we Sign an agreement for an apartment, we
    commit to pay the rent 1st of each month the payment accrues a
    regular interval off the month
    When we take a lone and we must pay the interest each month at the
    start of the month
    Ordinary Annuity:
    When we use the electricity or PTCL and we must pay the
    bill at the end of the month
    When you gave counteract of construction to someone when he
    complete the counteract the you pay him the money at the end of the
    counteract

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