Question

In: Finance

1- You just purchased a bond for $800. The bond has a face value of $1000,...

1-

You just purchased a bond for $800. The bond has a face value of $1000, pays $50 in coupons each year, and has a yield to maturity of 7%. If the bond does not default (so you receive all the promised coupons and the face value at maturity), what will be your return?

		0%
		5%
		7%
		12%

2- Suppose that you are now 30 and that you would like $2 million at age 65 to fund your retirement. You would like to save each year an amount that grows by 5% each year (that is, if you save $1 this year, you will save $1.05 next year). Assume that the discount rate is 8%. How much should you start saving at the end of this year? (Hint: first calculate the present value of the $2 million, then use the growing annuity formula to calculate the amount you must save at the end of this year).

		$8,920
		$6,473
		$15,200
		$57,142

Expert Solution

1. 7% is a correct option

Yield to maturity represent the rate of return of a Bond if Bond does not default.

2. $6,473 is correct option

Future Value of Growing Annuity (FV) = $2,000,000

Discount rate (r) = 8%

Growing rate of Annuity (g) = 5%

Time(n) = 35 years

First Payment = P

Presently we will calculate the present value(PV) of $2,000,000

Now by using Growing Annuity Formula for Present value, we can calculate the First Payment (P)

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.

jeff jeffy answered 5 months ago

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