GSM 5110: Economics, Finance and Markets

Homework 2: Time Value of Money (Multiple Cash Flows; Annuity; Loan Amortization; EAR vs. APR)

Due 01/29/14

Please answer the following questions. There are three options regarding the format to complete this assignment. 1) Type everything including all math-related content; 2) Type the non-math-related content and leave enough space to handwrite math-related content such as equations and special symbols after you print it out; 3) Handwrite everything legibly. If we cannot read your handwriting and/or there is ambiguity, you will not earn the credit for that question. Remember to show all steps with calculations being conducted on a scientific or basic calculator. No financial calculators are allowed. You should bring a hardcopy of your homework to class on the day of the deadline and hand in to me at the beginning of the class. Ko9ii

Chapter 6

LO1: How to determine the future and present value of investments with multiple cash flows.

LO2: How loan payments are calculated.

LO3: How loans are amortized or paid off.

LO4: How interest rates are quoted (and misquoted).

1) Present Value and Multiple Cash Flows [LO1]: Seaborn Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows?

|Year |Cash Flow |
|1 |$ 950 |
|2 | 1,040 |
|3 | 1,130 |
|4 | 1,075 |

|Year |Cash Flow |