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Finance and Investment assignemnt 1

FV W/ Cont. Compounding =PV*e^rt Where: PV= Present Value R= Rate T= Time (i) Annually FV= $ 1,000*e^(.45)(1) $ 1,046.00 (ii) 6 monthly FV= $ 1,000*e^(.45/2)(1*2) $1,046.00 (iii) Quarterly FV= $ 1,000*e^(.45/4)(1*4) $1,046.00 (iv) Monthly FV= $ 1,000*e^(.45/12)(1*12) $1,046.00 (v) Daily FV= $ 1,000*e^(.45/365)(1*365) $1,046.00 (vi) Hourly FV= $ 1,000*e^(.45/8760)(1*8760) $1,046 (c) Effective interest rate tries to determine the entire cost of borrowing. It accounts for the effect compounding interest which is excluded from the stated or nominal interest rate. For instance, a loan with 10% interest compounded monthly will actually have a rate greater than 10% since the rate is accumulated on monthly basis. Effective Rate, R=(1+I/N)^N Where: R- Effective Rate I= Stated Interest Rate N=Number of compounding periods per year (i) Annually The effective annual interest rate is similar to compounded rate since number of compounding period is one. (ii) 6 monthly R=(1+0.045/2)^2 1.0225% 2.2500% (iii) quarterly R=(1+0.045/4)^4 1.0341% 3.4100% (iv) Monthly R=(1+0.045/12)^12 1.0420% 4.2000% (v) Daily R=(1+0.045/365)^365 1.0459 4.5900% (vi) Hourly R=(1+0.045/8,760)^8,760 1.0460 4.6000% (d) R=e^n R=2.718^0.045 = 4.6000% Question 4 (a) F.V = P.V (((1+r))^n-1)/r) Where: FV – Future Value PV-Present Value R- Interest Rate N= Time taken 2,000= 1000(((1+2%)^n-1))/.02) 2,000=1,000(1.02)^n-1/.02 (1.02)^n-1=(2000/1000)*.02 (1.02)^n-1=0.04 (1.02)^n=0.04 Nlog 1.02=1.04 N=1.04/In1.02 N=1.04/0.0198 N=52.5 Years (b) 2,000= 1000(((1+5%)^n-1))/.05) 2,000=1,000(1.05)^n-1/.05 (1.05)^n-1=(2000/1000)*.05 (1.05)^n-1=0.1 (1.05)^n=0.1 Nlog 1.05=1.1 N=1.1/In1.05 N=1.1/0.0488 N=22.54 Years (c) 2,000= 1000(((1+7%)^n-1))/.07) 2,000=1,000(1.07)^n-1/.07 (1.07)^n-1=(2000/1000)*.057 (1.07)^n-1=0.14 (1.07)^n=0.14 Nlog 1.07=1.14 N=1.14/In1.07 N=1.14/0.0677 n-16.85 (d) i=2, i=5 and i=7. (5 marks) F.V = P.V (((1+i/2))^0.5d-1)/i*2) (1+0.5i)^0.5d-1=(FV/PV)i*2 (1+0.5i)^0.5d = (FV/PV)i*2+1 d *0.5e^(1+0.5i)=(FV/PV)i*2+1 d = (FV/PV)i*2+1 0.5e(1+0.5i) Illustration: D= (2000/1000)*2*2+1 (0.5*2.718*(1+0.5*0.02) =9/2.269 =3.967 or 4% D= (2000/1000)*2*5+1 (0.5*2.718*(1+0.5*0.05) =21/2.09 =10.05 or 10% D= (2000/1000)*2*7+1 (0.5*2.718*(1+0.5*0.07) =29/2.07 =14% (e) F.V = P.V (((1+i/2))^0.25d-1)/i*4) (1+0.25i)^0.25d-1=(FV/PV)i*4 (1+0.25i)^0.25d = (FV/PV)i*4+1 d *0.25e^(1+0.25i)=(FV/PV)i*4+1 d = (FV/PV)i*4+1 0.25e(1+0.25i) Question 5 Global Financial Crisis (GFC) with explanation of securitization and discussion on the role it played in the beginning of the GFC. Global financial crisis is about the failure of global major financial institutions. The global financial crisis originated form in the United States (US) when investors lost confidence in mortgages
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