Reference no: EM133182465

Section 1: TVM basics:

1. Suppose a State of Texas bond will pay $2,000 ten years from now. If the going interest rate on these 10-year bonds is 0.5%, how much is the bond worth today?

2. Suppose you have $1,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 1.0% annual interest, compounded annually. How much will you have when the CD matures?

3. Suppose you have $1,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 1.0% annual interest, compounded quarterly. How much will you have when the CD matures?

(Hint: To incorporate the compounding effect, you need to convert the annual interest rate into the quarterly interest rate, and convert years into quarters to get correct answer).

4. Suppose you have $1,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 1.0% annual interest, compounded monthly. How much will you have when the CD matures?

(Hint: To incorporate the compounding effect, you need to convert the annual interest rate into the monthly interest rate, and convert years into months to get correct answer).

5. Suppose you have $1,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 1.0% annual interest, compounded daily. How much will you have when the CD matures?

(Hint: To incorporate the compounding effect, you need to convert the annual interest rate into the daily interest rate, and convert years into days to get correct answer).

6. Suppose the U.S. Treasury offers to sell you a bond for $900.00. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

Section 2: TVM applications

1. Assume the couple John and Helen want to fund a college education for their son, William, age 2. William will attend college starting at age of 18. He needs $90,000 available at age 18 for his college expense. The couple feels they can make 6% after-tax return annually in a 529 education fund. How much do they need to deposit today to meet their goal?

2. Assume the couple John and Helen want to fund a college education for their son, William, age 2. William will attend 4 years of college starting at age of 18. He needs $60,000 available at age 18 for his college expense. Starting from now, the couple plans to invest $3000 to the 529 education fund at the end of each year. What rate of annual return do they need to achieve?

3. Construct an amortization schedule for a 15-year, $300,000 loan with a 4.2% interest rate compounded monthly. The loan will be paid back in 15 years making monthly payments. You need to calculate the principalpayment and interest payment,respectively,of each month. Hint: Please referto the excel file of "Loan Amortization "posted in Unit 4 "Lecture". Specifically, you need to update the model from "yearly" payment to "monthly" mortgage payment. 15 years *12 = 180 months. Therefore, you should demonstrate 180 principal payments and interest payments for each month.

4. Construct an amortization schedule for a 30-year, $300,000 loan with a 6.7% interest rate compounded monthly. The loan will be paid back in 30 years making monthly payments.You need to calculate the principal payment and interest payment, respectively,of each month.Hint: Please refer to the excel file of "Loan Amortization "posted in Unit 4 "Lecture". Specifically, you need to update the model from "yearly" payment to "monthly" mortgage payment. 30 years *12 = 360payments. Therefore, you should demonstrate 360 principal payments and interest payments for each month.

Section 3: Bond Valuation

1. The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

2. Masson Inc. recently issued noncallable bonds thatmature in 10 years. They have a par value of $1,000 andan annual coupon of 5.5%. If the current market interestrate is 7.0%, at what price should the bonds sell?

3. Ezzell Enterprises' noncallable bonds currently sellfor $1,165. They have a 15-year maturity, an annualcoupon of $95, and a par value of $1,000. What is theiryield to maturity?

4. Quigley Inc.'s bonds currently sell for $1,080 andhave a par value of $1,000. They pay a $100 annual couponand have a 15-year maturity, but they can be called in 5years at $1,125. What is their yield to maturity (YTM)?