Solution- CHE374F – Engineering Economic Analysis
Quiz #1, September 29, 2010
Question # 1 (5 marks)
Given
Calculate
Answer
6 % interest per
year (effective)
Quarterly interest rate based
on quarterly compounding
(1+6%) = (1+r)^4
1.47%
10% interest per
year based on
daily
compounding
Interest per year (effective)
(1+10%/252)^252=1+r
10.51%
4% interest per
year, with
quarterly
compounding
Continuously compounding
interest rate per quarter
(1+4%/4)^4 = exp(4*r)
1%
2% interest per
month
compounded
monthly
Continuously compounding
interest rate per day
(1+2%)^12 = exp(r*252)
.09%
6% interest per
quarter with
monthly
compounding
Interest per five years based
on semi-annual compounding
(1+6%/3)^12 = (1+r/10)^2
126.16%
Assume 252 trading days per year, where applicable.
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Question # 2. (3 marks)
Determine the effective annual rate for an investment that earns 3% per quarter based on
quarterly compounding for the first 5 months, then earns 10% per year based on semiannual compounding for another 6 months.
First approach:
11.29%
Second approach:
11.29%
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Bonus Question (2 marks)
Discuss the principal-agent problem that is often present in public firms? Give a strategy
that may correct this issue.
The principal-agent problem arises in organizations between the interests of
shareholders who lend liquidity to CEOs and management that run the company.
Shareholders desire conservative, steady growth, but management may seek out risky,
short-term investments. Mechanism to correct this issue align the interests of
management with shareholders. Examples include stock options or deferred
compensation.
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