Homework answers / question archive / 1

1

Finance

Share With

1. Consider the lower bound of the European call option. Use your intuition to try to explain why this must be the lower bound. (Hint: read the text- book and lecture notes) Searching for intuition essentally menas looking for an explanation that is easy to understand (aim for easy for a child to understand) but need not be complete or a proof.

2. Consider a $1978 loan to be paid in 8 equal installments every 6 months at 6.75% interest rate (annual). The maturity of the loan is 4 years. Fill in the chart. Per Payment PV Factor Formula Total.

3.

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $50,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 3%. He currently has $90,000 saved, and he expects to earn 10% annually on his savings. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal? Do not round your intermediate calculations. Round your answer to the nearest cent.