Math 7780: Financial Mathematics HW #2 Assignment for Wednesday, February 7, 2007 1. Suppose, beginning now, the rate of inflation is 3% for the next 12 months, 5% for the following year, and 8% the year after that (assume these are the effective rates). What would be the equivalent in 3 years of $100 today? In other words, in three years, what dollar amount would have the same purchasing power then as $100 today? 2. What is the equivalent today of $100 in three years? 3. Suppose the inflation rate is 2% every month. What is the yearly inflation rate? 4. Suppose the inflation rate is constant for every month. The yearly rate comes out to be 24%. What is the monthly rate? 5. Suppose you borrow $10,000 to pay back in weekly installments over 2 years (104 weeks). The lender charges 10% compounded weekly. How large is the weekly installment? 6. A car dealer loans you $10,000 so that you can buy a car, and says that you will need to pay $250 a month for 60 months to pay off the loan. Is this a fair offer? Explain your answer carefully.