Formulas

Question 1

Calculating the yield on the bond of the short-term nominal risk-free interest rate

Answer 1

Nominal risk-free interest rate + Default Premium + Liquidity premium + Maturity Premium

Question 2

Equation to use to cal. how long for investment account to double

Answer 2

FVn = PV[1+(rs/ln)]mN

Question 3

Calculating trade deficit using GDP Data of a country

Answer 3

S = I + (G – T) + (X – M), where

S = Domestic savings

I = Private investment

G = Government spending

T = Total government tax revenues

X = Exports

M = Imports

G – T = The government deficit

X – M = The trade deficit

The trade deficit will be (X – M) = (S – I) – (G – T).

Question 4

Equation for future value

Answer 4

FV=PV(1+rsm)mN

Question 5

What is EAR and how it is calculated?

Answer 5

The effective annual rate (EAR) when compounded daily

EAR = (1 + Periodic interest rate)m– 1  

Question 6

An investment pays €300 annually for five years, with the first payment occurring today. The present value (PV) of the investment discounted at a 4% annual rate is closest to:

€1,336.
€1,389.
€1,625.

Answer 6

B is correct, as shown in the following calculation for an annuity (A) due:
PV=A⎡⎣⎢⎢⎢⎢1−1(1+r)Nr⎤⎦⎥⎥⎥⎥(1+r)

where A = €300, r = 0.04, and N = 5.
PV=€300⎡⎣⎢⎢⎢⎢1−1(1+.04)5.04⎤⎦⎥⎥⎥⎥(1.04)
PV = €1,388.97, or ≈ €1,389.