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FN2190 - Tutorial 3

This document contains sample questions from a tutorial on understanding interest rates for an asset pricing and financial markets course. The questions cover topics like compounding frequency, calculating present and future values under different compounding schedules, distinguishing between effective annual rate and annual percentage rate, calculating loan payments under an annuity, and identifying true/false statements about interest rates. The document provides context for discussing these interest rate concepts in a tutorial session.

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Edwin Law
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150 views

FN2190 - Tutorial 3

This document contains sample questions from a tutorial on understanding interest rates for an asset pricing and financial markets course. The questions cover topics like compounding frequency, calculating present and future values under different compounding schedules, distinguishing between effective annual rate and annual percentage rate, calculating loan payments under an annuity, and identifying true/false statements about interest rates. The document provides context for discussing these interest rate concepts in a tutorial session.

Uploaded by

Edwin Law
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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HKU SPACE

COLLEGE OF BUSINESS AND FINANCE


FN2190 – ASSET PRICING & FINANCIAL MARKETS
FIRST SEMESTER, 2018-2019

Tutorial 3 – Chapter 4 Understanding Interest Rate


(For the discussion in Week 6: 16 October, Tuesday)

Question 1 (Compounding Frequency)


You are quoted an interest rate of 6% on an investment of $10 million. What is the value
of your investment after 4 years if interest is compounded:
(a) Annually?
(b) Monthly?
(c) Continuously?

Question 2 (Compounding Frequency)


The quarterly compounded interest rate is 8%. What is the present value of $1,000 to
be received in nine months? What is the future value of $5,000 if it is deposited in a
bank account today and remains there for 15 months?

Question 3 (EAR versus APR)


An investment product promises semi-annual cash-flows of $3,500 for the next five
years. If the stated interest rate with monthly compounding is equal to 10%, what is the
present value of the cash-flows that the investment promises?
FN2190 – Asset Pricing & Financial Markets Tutorial 3____________________Mr. Clive Man Chung HO

Question 4 (Annuity)
You take out a loan today to pay for refurbishments to your house. The loan requires
you to make monthly repayments over the next 10 years. The cost of the refurbishments
is £20,000.

If the effective annual interest rate is 8%, what will your monthly loan repayment be?

Question 5 (True or False Statement)


(a) Assuming that interest rates are positive, the effective annual interest rate will
always be larger than the quoted six-month APR.
(b) You should always use effective rates to perform compounding and discounting
operations, and never use APRs.
(c) The real rate of interest is exactly equal to the difference between the nominal
interest rate and the inflation rate.

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