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Question 22 (5 points) All else being equal that is, identical present value, identical number of periods and identical inter
Question 20 (5 points) You have been sued. If you lose the case, you will have to pay $10,000 three years from now. If you wi
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Answer #1

Question 22)

In case of annuity due, payments are made sooner as compared to ordinary annuity and hence have higher present value as compared to ordinary annuity. All other things are identical. Only in case of interest rate going down, will ordinary annuity payment be more than annuity due.

Answer is False

Option B

Question 20)

Probability of loss is 70% and payment of 10,000 is to be made three years from now. After three years 10,000 is to be paid but probability is 70% and amount will be 70% of 10,000 = 7,000

Risk free rate is 5% and market premium to be added is 4% hence total rate is 5 + 4 = 9%

This is to be calculated for three years.

Hence correct answer is

PV = $ 7000 * PVF ( 3,9%)

Option C

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