Finance for International Business

Basic Terminology and Techniques

The following refresher exercises will help you throughout the course. The objective is to
make sure that you know the basic terminology and techniques, while developing some intuition. In
some places the answer is obvious (on purpose), but please make sure that you can use the calculator
and the spreadsheet to get the answer. This will help you in more complicated situations where the
answer is not obvious, but the methodology is the same.

1) Currency appreciation: Consider price of beer. Let's pretend that last year a bottle of beer
used to cost one dollar, but this year it costs two dollars per bottle.

a) This means beer costs twice as much as last year; or beer price has gone up
by ___________%
b) One dollar buys half as much beer as last year; or dollar has fallen in value by
___________%

Note: The same idea works for relative values of currencies, i.e. appreciation of Yen against
the dollar or depreciation of dollar against the Yen.

2) Do problem 1 using different data. Last year a bottle of beer used to cost $ 0.50, but this year
it costs $ 0.60.

a) Beer price has gone up by _________%

b) Dollar has fallen in value by _________%

3) Find PV for following cash flows using a discount rate of 10% per period, all periods are of
the same (but unspecified) duration.

0_____1_____2_____3_____4
$10 $10 $10 $110

a) use calculator, make sure that you know the procedure.

p/yr=____, N=____, PMT=_____, i=____, FV=_____,
PV=_____

b) use spreadsheet, make sure that you know the procedure

Show spreadsheet printout

c) use intuition: PV=_____because ____________________

Hint: Compare coupon rate and discount rate.

d) if we use a higher discount rate the PV will be

higher/lower

e) do part 'a' using the 'cashflow mode' on the calculator.

 CF0 = ____, CF1 = ____, times = _____, CF2 = ____,
PV = ____

4) Use the cashflow diagram form problem 3 with the following data:
Each period is 6 months long. Stated rate is 10%/year compounded semi-annually.

a) use calculator, make sure that you know the procedure.

p/yr=____, N=____, PMT=_____, i=____, FV=_____,
PV=_____

b) use spreadsheet, make sure that you know the procedure

Show spreadsheet printout

5) Find IRR for following cash flows:

0_____1_____2_____3_____4
($100) $10 $10 $10 $110

a) use calculator, make sure that you know the procedure.

p/yr=____, N=____, PMT=_____, FV=_____,
PV=_____, IRR=____% per period.

b) use spreadsheet, make sure that you know the procedure

Show spreadsheet printout

c) use intuition: if initial cashflow is changed to (90) the IRR will be Higher/lower
because _________________________________
Hint: Consider the impact of a higher discount rate on the PV of a given set of cash flows.

6) The Stated rate i=10% per year compounded semi-annually. The Effective annual rate is
__________%

a) use built-in calculator functions

b) use formula

7) Term structure:Two year rate is i=5% per year

Three year rate is i=6% per year

Find the implied forward rate for the third year.

i=_____%
8) Real rate, r = 5% inflation rate,  = 2%

a) Find the nominal rate (i) using approximate method, i.e. i = r+
i =______%

b) Find the nominal rate (i) using the exact method,

i.e. 1+ i = (1+r)*(1+) i =_____%

9) Do problem 9 using r = 5% and  = 100%

a) i =_____% approximately

b) i =_____% using the exact method.

Note: Compare ‘a’ and ‘b’ in problems 8 and 9. The approximation is reasonable only when
the rates are small.