1. An investment will return $1,000 in cash in each of years 4 and 5. You...

1. An investment will return $1,000 in cash in each of years 4 and 5. You expect to earn 10%. Is the present value (PV) for this investment properly calculated by the expression: $1,000 (PV/A, 10%, 2) (PV/FV, 10%, 3)?

2. For the above investment, is the PV properly calculated by: $1,000 (PV/A, 10%, 2) (1/(1.1)² )?

3. For the above investment, is the PV also properly calculated by: $1,000/(1.1)⁴+ $1,000/(1.1)⁵ ?

4. A company issues $100k worth of bonds to fund the construction of a new building. The bonds pay $7K per annually at the end of each year for the next 10 years. At the end of the 10^th year the company also pays the lender back the $100k:

a) What is the interest rate the company is paying on the bonds?

b) The moment after the $100k of bonds issues the company announces it has lost a big account. The $100k worth of bonds are trading on the open market. For this reason, their value drops from $100k to $81.6k. What is the interest rate the bonds are now paying?

Expert Solution

jeff jeffy answered 4 months ago

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