Given 4% Interest PV = $500 received each year for 4 years FV = $500 invested...

Given 4% Interest PV = $500 received each year for 4 years

FV = $500 invested each year for 4 years

Consider that a 10-year UST offers 4.5% return, but a 10-year AAA Corporate Bond offers 5.6% => what causes the difference of 1.1%?

Consider that a 1-year UST offers 1.2%, but a five-year UST offers 2.1% => what two influences could be causing the 0.9% difference?

Expert Solution

1)

PV = Annuity * [1 - 1 / (1 + r)^n] / r

PV = 500 * [1 - 1 / (1 + 0.04)^4] / 0.04

PV = 500 * [1 - 0.854804] / 0.04

PV = 500 * 3.629895

PV = $1,814.95

2)

FV = Annuity * [(1 + r)^n - 1] / r

FV = 500 * [(1 + 0.04)^4 - 1] / 0.04

FV = 500 * [1.169859 - 1] / 0.04

FV = 500 * 4.246464

FV = $2,123.23

jeff jeffy answered 2 years ago

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