1.
In 1880 five aboriginal trackers were each promised the equivalent of 50 Australian dollars for helping to capture the notorious outlaw Ned Kelley. In 1999 the granddaughters of two of the trackers claimed that this reward had not been paid. The prime minister stated that if this was true, the government would be happy to pay the $50. However, the granddaughters also claimed that they were entitled to compound interest.
a. How much was each entitled to if the interest rate was 4%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Future value$
b. How much was each entitled to if the interest rate was 8%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Future value$
2.
Professors Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of $77,000 at age 65, the firm will pay the retiring professor $525 a month until death.
a. If the professors remaining life expectancy is 15 years, what is the monthly rate on this annuity? What is the effective annual rate? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Monthly rate on annuity %
Effective annual rate %
b. If the monthly interest rate is .75%, what monthly annuity payment can the firm offer to the retiring professor? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Monthly annuity payment $
3.
A factory costs $420,000. You forecast that it will produce cash inflows of $100,000 in year 1, $160,000 in year 2, and $260,000 in year 3. The discount rate is 10%.
a. Calculate the PV of cash inflows. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Present value $
b. Is the factory a good investment?
No
Yes
4.
If you earn 8.50% per year on your bank account, how long will it take an account with $100 to double to $200? Use the log formula. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Number of years
5.
Compute the present value of a $180 cash flow for the following combinations of discount rates and times: (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Present Value
a. r = 12%, t = 8 years $
b. r = 12%, t = 16 years
c. r = 6%, t = 8 years
d. r = 6%, t = 16 years
6.
a. If you take out an $8,300 car loan that calls for 48 monthly payments starting after 1 month at an APR of 6%, what is your monthly payment? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Monthly payment $
b. What is the effective annual interest rate on the loan? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Effective annual interest rate %
7.
Refer the table below:
Maturity Coupon
Bid Price
Asked Price
Asked Yield, %
2012 May 15
1.375
101:05
101:06
0.78
2013 May 15
3.625
106:31
107:01
1.23
2014 May 15
4.75
111:22
111:23
1.70
2020 May 15
8.75
144:17
144:19
3.44
2025 Aug 15
6.875
133:07
133:11
3.94
2030 May 15
6.25
128:25
128:27
4.12
2040 May 15
4.375
100:28
100:29
4.32
What is the current yield of the 4.375% 2040 maturity bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Current yield %
8.
A 25-year Treasury bond is issued with face value of $1,000, paying interest of $78 per year. If market yields increase shortly after the T-bond is issued, what is the bonds coupon rate?
(Round your answer to 1 decimal place.)
Coupon rate %
9.
A bonds credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 7.6%. A-rated bonds sell at yields of 7.9%. Assume a 10-year bond with a coupon rate of 7.1% is downgraded by Moodys from Aa to A rating.
a. Calculate the initial price. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Initial price $
b. Calculate the new price. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
New price $
10.
One bond has a coupon rate of 8.2%, another a coupon rate of 9.6%. Both bonds have 13-year maturities and sell at a yield to maturity of 8.5%.
a. If their yields to maturity next year are still 8.5%, what is the rate of return on each bond? (Do not round intermediate calculations. Round your answers to 1 decimal place.)
Rate of Return
Bond 1 %
Bond 2 %
b. Does the higher coupon bond give a higher rate of return?
Yes
No
11.