What is the market value of an investment

Reference no: EM132183962

Questions -

Q1. Today is January 1. The interest rate is 8% and investors are convinced that it will stay at 8% for the next 10 years. A corporate bond comes on the market that for the next 7 years will pay $160 on December 31 to whoever owns the bond on that date. On January 1, 7 years from today, the issuer of the bond will redeem the bond by buying it back from the bondholder for $2,000. What should this bond sell for? (D)

a. $3,120

b. $2,160

c. $1,600

d. $2,000

e. $2,780

Q2. The interest rate will be 10% for one more year, but a year from now, it will fall to 5% and stay at 5% forever. What is the market value of an investment that is sure to pay $220 a year forever, starting two years from today? (A)

a. $4,000

b. $4,400

c. $2,000

d. $2,200

e. $5,000

Q3. A certain wine costs $3 a bottle to produce. It improves in taste if stored properly for a period of time. When it is newly bottled, people are willing to pay only $2 a bottle to drink it. But the amount that people are willing to pay to drink a bottle of this wine will rise by $3 a year for the next 50 years. Storage costs, not including interest, are $.50 per year. If the interest rate is 5% and the wine is kept by rational investors, how old will it be when it is drunk and what will be its price at that time? (B)

a. 50 years old and $152

b. 16 years old and $50

c. 50 years old and $153

d. 20 years old and $63

e. 4 years old and $14

Q4. You buy a painting for $1,280. Its market value will rise by $80 per year for the next 30 years. It is worth $80 a year to you to have it hanging on the wall. The interest rate is 10%. In how many years will you sell it? (D)

a. 30

b. Immediately

c. 8

d. 4

e. 5

Reference no: EM132183962

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