Write a short essay of 500-600 words for each of the following questions. For each question, illustrate with an appropriate example in your answer.
Question 1 (10 marks, 5 marks for each part)
- ‘Risk aversion implies that corporate managers will only invest in low risk investments’. Critically evaluate this statement (indicate whether you agree or disagree in your answer).
- Is it possible for an ordinary annuity to have the same present value as perpetuity if the cash flows and discount rates are identical? Explain.
Question 2 (15 marks, 5 marks for each part)
- An investment scheme pays $200 at the end of each of the next 4 years, $400 at the end of year 5, $300 at the end of year 6 and $500 at the end of year 7. Given that other investments of equal risk earn 10% per annum, calculate the present value and future value of this investment.
- George won a lottery of $200,000. He invested the entire amount and expects a yearly return of 10% per annum on his investment and he will receive 150 equal monthly payments. The first payment is expected in 2 years. Find the size of the payments.
- Excel Bank pays its clients 10% interest per annum, compounded on a quarterly basis. To remain competitive, the bank’s major competitor, Advanced Bank is willing to match the interest rate offered by Excel Bank, but interest will be compounded on a monthly basis. What nominal rate of interest must Advanced Bank offer to its clients?