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1. You are given a discount function v where v(1, 3) = 0.9, v(3, 6) = 0.8, v(8, 6) = 1.2

(a) How much must you invest at time 1, in order to accumulate 10 at time 8?

(b) If you invest 100 at time 3, how much will have accumulated by time 8?

2. You are given interest rates i₀ = i₁ = 0.25, i₂ = i₃ = 1. You have entered into business transaction where you will receive 2 at time 0, 5 at time 3 and 10 at time 4, in return for a payment by you of 3 at time 2. In place of all these cash flows you are offered a single payment made to you at time 1. What is the smallest payment you would accept?

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Statistics and Probability, Statistics

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