Business

    Assignment 1

Chapter 6

  1. You plan to deposit $1,000 in Year 1, $1,200 in Year 2 and $2,000 in year 4 in your savings account. You think that you can earn 6% per year. How much will you have in your account in Year 6?
  2. Bank X promises to pay you $5,200 per year for 8 years, whereas Bank Y offers to pay you $7,300 per year for 5 years.

a) Which of these cash flow streams has the higher present value (PV) if the discount rate is 5 percent?
(Hint: compare the PVs of annuity X ($5,200 per year for 8 years) with annuity B ($7,300 per year for 5 years)

b) Which one should you choose between Bank X and Bank Y?

  1. Today, Dinero Bank offers you a $60,000, five-year term loan at 7.5 percent annual interest (APR). What will your annual loan payment be? (Hint: Find PMT)
  2. You buy an annuity that will pay you $24,000 a year for 25 years. The payments are paid on the first day of each year. What is the value of this annuity today if the discount rate is 8.5 percent? (Hint: annuity due)
  3. The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. If the required return on this investment is 4.3 percent, how much will you pay for the policy? (Hint: Find PV of perpetuity)
  4. Find the EAR in each of the following cases:
    a. APR 9% with quarterly compounding

b. APR 18% with monthly compounding

c. APR 14% with semi-annual compounding

  1. Find the APR, or stated rate, in each of the following cases:
    a. EAR 11.5%, semi-annual compounding

b. EAR 12% with quarterly compounding

Chapter 7

  1. Consider a 3-year bond with a face value of $1,000 that has a coupon rate of 7%, with semi-annual payments.
    a. What is the dollar amount of each coupon from this bond?

b. How many times of coupon payments will be made to the maturity?

  1. Assume that a bond will make coupon payments every six months as shown on the following timeline:

a. What is the coupon rate (in percent)?

b. What is the face value?

  1. What is the bond price of $1,000 bond with 6% coupon rate, annual coupons, and 2 years to maturity if the YTM is 8%?
  2. What is the bond price of $1,000 bond with 6% coupon rate, semi-annual coupons, and 2 years to maturity if the YTM is 8%?
  3. Suppose a 10-year, $1000 bond with an 8% coupon rate and annual coupons is sold for $1034.74.
    a. What is the bond’s YTM?

b. Is the YTM higher or lower than the coupon rate?

Sample Solution

ACED ESSAYS