1. Finance Questions Assignment Student’s Name Course Title: Course Code: Professor Name: Date:

2. QUESTION 1 Interest rate is 6%. What is PV of 5 year ordinary annuity of 2,000 per year plus additional 1,000 at end of year 2?

3. Calculations Interest rate is 6%. What is PV of 5 year ordinary annuity of 2,000 per year plus additional 1,000 at end of year 2? We calculate the PV for first 2 years PV = 2000 [ 1-(1.06)^-2 ] 0.06 PV = 3666.79 Then the PV for the last 3 years is given by PV = 3000 [ 1-(1.06)^-3 ] 0.06 PV = 8019.04 Total PV = $11685.83

4. QUESTION 2 I got 500,000 dollars. I invested it at 9.00% per year, how much can I withdraw after 10 years? Interest = principle x rate x time =500000 x 0.09 x 10 =$ 450000 Total =Principle + Interest =500000 + 450000 =$ 950000

5. QUESTION 3 What is current price of a zero coupon bond with 200$ face value, maturing in 2 years with quoted rate of 3%. Annual Compounding? Formula

6. Calculations Periodic payments =0.03 x 200 = $6 Maturity value for year 1 = 200 x 0.03 x 1 = $6 year 2 = 206 x 0.03 x 1 = $6.18 Maturity value =212.18 Price = 6 x [1- (1+0.03)^-2] + 212.18 (1+0.03) ^-2 0.03 Price = 11.48 + 200 Price = $211.48

7. QUESTION 4 Where do I get lowest rate of return? 8% nominal interest rate with monthly compounding, 7% nominal interest rate with daily compounding, 7% nominal interest monthly compounding, or 8% interest nominal daily compounding. The lowest return will be on 7% nominal interest monthly compounding

8. QUESTION 5 Business A costs 600,000 making anually 40,000 indefinetly. Cash flow of 40,000 is recieved at end of every year, with first cash flow occuring the next year. Business B is simialir, except that cash flow of 40,000 is recieved at the start of every year, with first cash occur right away. (perpetuity grows with every flow). If I wanted 10% return on the investment, which is true of the statements below? A: Cash flow of Business A MUST be 4.33 growing annually

9. QUESTION 6 I can buy annuity that pays 200 dollars for every year for 5 years. I could earn 7% on my money in other investments with equal risk. What is the most I should pay for the annuity. Formula

10. Calculations I can buy annuity that pays 200 dollars for every year for 5 years. I could earn 7% on my money in other investments with equal risk. What is the most I should pay for the annuity. Option 2 Interest= 200 x5 = $1000 Option 1 1000 = PMT [(1.07)^5 -1] 0.07 200 = 5.75 PMT PMT =200/5.75 =$34.78

11. QUESTION 7 Two Bonds are outstanding. Bond 1 was issued 10 years ago with coupon rate of 8%. Bond 2 was issued 5 years ago with coupon rate of 5%. Both bonds have 30 years terms and face value of 600$. THe going interest rate is 10% today. If it is a semi-annual coupon payment, was are the said prices of the two bonds at this time. The formula to use will be

12. Calculations Bond 1: coupon = 0.08 x 600 = $48 Maturity value= 600[1-(1+0.08)^-20] = $5890.88 0.08 Price= 48 [1-(1+0.08)^-20] + 5890.88 (1.08)^-20 0.08 Price = 471.26 + 1263.88 = $1735.14

13. Continuation Bond 2: coupon = 0.05 x 600 = $30 Maturity value= 600[1-(1+0.05)^-10] = $4633.04 0.05 Price= 30 [1-(1+0.05)^-10] + 4633.04 (1.05)^-10 0.05 Price = 231.65 + 2844.29 = $3075.94