Write down the formula for the present value of an investment that produces cash flows of C1, C2, and C3. (page 36 of the book)
What is the formula for the two-year discount factor, DF2? (page 37 of the book)
Can the two-period discount rate (r2) ever be smaller than the one-period rate (r1)? (page 37 of the book)
Can the two-period discount factor (DF2) ever be larger than the one-period factor (DF1)? (page 37 of the book)
The NPV of an investment is often written as NPV = C0 + PV. Is C0 usually positive or negative? (page 36 of the book)
An investment produces an annual cash flow C forever. Is the return C/PV or C/PV -1? (page 40 of the book)
What is the formula for a growing perpetuity? Can the formula be used if r>g? (page 41 of the book)
Write down the formula for an annuity that produces a cash flow C for each of the next three years. (page 41 of the book)
Now suppose you are offered an annuity that produces a cash flow of $C for each of three years starting today. Write down the formula for its present value. Is this annuity more or less valuable than the previous one? Why? (page 42 of the book)
Your mortgage requires you to make regular monthly payments over 30 years. Does a larger proportion of your first payment go to paying interest on the loan or reducing its amount? What about the last payment? (page 42 of the book)
Would you rather have an investment that pays 5 percent a year continuously compounded, semi-annually compounded, or annually compounded? Why? (pages 46-47 of the book)
Can the real rate of return be larger than the nominal rate? Explain. (page 49 of the book)
