Question

1.Victor is thinking about buying a $1,000 bond that has a 7% semiannual coupon and 14 years to maturity.  The expected rate in the marketplace for investments similar to this is 8%.

Will this bond be a premium or discount bond? __________________

What is the present value of the coupon stream? ________________

What is the present value of the face value? ____________________

What is the total value of the bond? __________________________

If the bond is priced at 98, should Victor buy or not buy? _________

2.Rosemary just received a call from a lawyer, who informed her that a distant cousin of hers left her 400 shares of preferred stock.  The attorney told Rosemary that the inheritance was worth approximately $20,000 and the shares paid a dividend of $3.80 per year.  What rate of return is the stock getting? _______________

If Rosemary knows that other investments similar to this one are earning 8%, should she keep the stock or sell it? ____________

3. Ted and Amy have found their dream house.  They will make monthly payments of $1,000 each for 20 years and the bank has quoted them a rate of 6%.  How much are Ted and Amy borrowing?

4. Classy Jewelry and More, Inc. is talking with its bank about a $360,000 commercial loan.  The loan will be for three years at 8% and will make LEVEL PRINCIPAL PAYMENTS at the end of each of the three years.  Write an amortization schedule for the loan and fill in the following blanks.

Amount of annual principal payment ___________________

Balance of loan at the end of year one __________________

Amount of interest in year two ________________________

Amount of the total payment in year two ______________

Total amount of interest paid over the life of the loan __________________

5. Use the formula for the following problem.

Katie has $5,300 saved from working summers.  She has it in an account earning 4.6% with semiannual compounding and will leave it there until she graduates from college in three years.  How much will she have when she graduates?

6.   Use the tables for the following problem.

Polly wants to buy her first home in five years.  She will need $15,000 as a down payment.  Polly just won some money on a gambling boat.  Her savings account, which is compounded quarterly, earns an annual rate of 8%.  How much should Polly set aside now out of her winnings to have enough for her down payment?

Table ________________

Row _________________

Column (rate) _________

Factor _______________

          Present Value ___________

7.  Anderson  Bank and Trust is advertising five year loans at a 7.8% APR with monthly payments.  What is the effective annual rate on this loan? _______________

8.  Dalton just bought a certificate of deposit at his bank and the rate printed on the front is 4.9%.  Dalton knows that inflation is running at 2.25%.

What is the APPROXIMATE real rate Dalton is getting? ________________

What is the EXACT real rate Dalton is getting? _________________

9.  Nancy’s Antiques, Inc. just added a whole new line of furniture to her product line.  Nancy expects this addition to result in record high dividends of $4.00 and $4.50 in the next two years.  After that, she thinks her growth will level off at its usual 4.5% rate.  The rate expected in the marketplace for investments similar to Nancy’s is 6%.

What is the current value of a share of Nancy’s? ______________

What will the value of a share be in year two (P₂)? ______________

What will the value of a share be in year twelve (P₁₂)? ______________

Answer 1

Answer to Question 1:

Face Value of Bond = $1,000

Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50%*$1,000
Semiannual Coupon = $35

Annual Interest Rate= 8%
Semiannual Interest Rate = 4%

Time to Maturity = 14 years
Semiannual Period to Maturity = 28

Coupon Rate is lower than market interest rate, which means that this bond is trading at discount.

Present Value of Coupon Stream = $35 * PVIFA(4%, 28)
Present Value of Coupon Stream = $35 * (1 - (1/1.04)^28) / 0.04
Present Value of Coupon Stream = $35 * 16.66306
Present Value of Coupon Stream = $583.21

Present Value of the Face Value = $1,000 * PVIF(4%, 28)
Present Value of the Face Value = $1,000 / 1.04^28
Present Value of the Face Value = $1,000 * 0.33348
Present Value of the Face Value = $333.48

Total Value of the Bond = Present Value of Coupon Stream + Present Value of the Face Value
Total Value of the Bond = $583.21 + $333.48
Total Value of the Bond = $916.69

If the bond is price at 98 ($980), then Victor should buy this bond.