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3. For each of the following, calculate the prese...

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3. For each of the following, calculate the present value. PRESENT VALUE YEARS INTEREST RATE FUTURE VALUE 9 7% $15,451 6 9% $51,557 21 14% $886,073 27 16% $550,164 21. What is the future value in three years of $1,800 invested in an account with a stated annual interest rate of 10%, C = (1 + r/m)m (M is to the mth power) a) Compounded annually? b) Compounded semiannually? c) Compounded monthly? d) Compounded continuously? e) Why does the future value increase as the compounding period shortens? 49. Suppose you are going to receive $8,000 per year for 10 years. The appropriate interest rate is 9%. a) What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an annuity due? b) Suppose you plan to invest the payments for 10 years. What is the future value if the payments are on ordinary annuity? What if the payments are an annuity due? c) Which has the highest present value, the ordinary annuity or the annuity due? Which has the highest future value? Will this always be true? 7. If treasury bills are currently paying 4.7% and the inflation rate is 2.3%, what is the approximate real rate of interest? The exact real rate? 14. Laurel, Inc., and Hardy Corp. both have 7% coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 2 years to maturity, whereas the Hardy Corp. bond has 20 years to maturity. If interest rates suddenly rise by 2%, what is the percentage change in the price of these bonds? If interest rates were to suddenly fall by 2% instead, what would the percentage change in the price of these bonds be then? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of long-term bonds? I have my answers but am not confident in them so I would like to verify against others. Could you show the steps to help incase I am wrong and can see where I made mistakes. These are practice problems but can be made into final questions down the road so it would be good to know exactly how to do them if I were to see similar problems. Thanks!

 

Paper#10104 | Written in 18-Jul-2015

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