STOCHASTIC METHODS IN FINANCE 2022–23
STAT0013
Alexandros Beskos
Exercises 1 - Time Value of Money
1. To what amount will £1,000 accumulate after n years at 10 percent
compounded annually?
2. How many years will it take for £500 to grow to £1,039.50, if invested
at 5 percent compounded annually?
3. After examining various personal loan rates available to you, you find
that you can borrow funds from a finance company at 12% compounded
monthly, or from a bank at 13% compounded annually. Which is the
best deal?
4. What is the present value of £1,000 to be received after 8 years if we
discounted back to present at 3 percent per annum with continuous
compounding?
5. A bond pays a coupon of 10% semi-annually for 5 years. If the principal
is £1,000 and the discount rate is fixed at 8% (continuous compounding)
what is the present value of the bond? How much will its value change
if the discount rate is 8.25%?