1. Consider two projects. The first has a high payoff today and a low payoff next period. The second has a low payoff today and a high payoff next period.
A. Using a diagram explain why investors will not agree on which project is superior in the absence of a capital market.
B. Now show why both investors will agree on which project to select when there does exist a capital market.
C. Explain why present value coincides with the choices investors will make in the presence of a capital market.

2. If the interest rate equal 12% calculate the present value of the following cash flow streams.

3. In which of the following cases is the number called an "interest rate" actually an interest rate?
A. The bank states that you will earn an interest rate of 6% on your savings and calculates your daily balance by taking your balance from the previous day and multiplying it by 1+.06/365.
B. An automobile company offers to lend you $10,000 for three years at 1%. At the end of each year they ask you to pay $3,400.22.
C. The bank says that if you purchase a six month certificate of deposit from them for $5,000 that pays 7% interest they will return $5172.04.
D. A bond dealer offers to sell you an 8% bond for $1,000. The bond pays $40 every six months for five years (ten payments). The last payment will also include the return of your $1,000 investment (so the last payment will equal $1,040).