Write down the formula for the present value of an investment that produces cash flows of C1, C2, and C3. (Page 37)
What is the formula for the two-year discount factor, DF2? (Page 37)
Can the two-period discount rate (r2) ever be smaller than the one-period rate (r1)? (Page 38)
Can the two-period discount factor (DF2) ever be larger than the one-period factor (DF1)? (Page 37)
The NPV of an investment is often written as NPV = C0 + PV. Is C0 usually positive or negative? (Page 36-37)
An investment produces an annual cash flow C forever. Is the return C/PV or C/PV -1? (Page 40)
Write down the formula for an annuity that produces a cash flow C for each of the next 3 years. (page 41-42)
Now suppose that 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)
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 44)
What is the formula for a growing perpetuity? Can the formula be used if r >g? (page 46)
Would you rather have an investment that pays 5 percent a year continuously compounded, semi-annually compounded, or annually compounded? Why? (Pages 50-51)
