FINANCE-Assume that a bond makes 30 equal annual payments

1.
Problem 1.
Amortizing Bond
Assume
that a bond makes 30 equal annual payments of
$1,000starting
one year from today.
(This
security is sometimes referred to as an amortizing bond.)
If the
discount rate is
3.5%per annum, what is the current
price of the bond?

(Hint:
Recognize that this cash flow stream is an annuity and that the price of an
asset is the present value of its future cash flows.)
*Make sure
to input all currency answers without any currency symbols or commas, and use
two decimal places of precision.

2.
Problem 2.
Coupon Bond
Assume
that a bond makes 10 equal annual payments of
$1,000starting
one year from today.
The bond
will make an additional payment of
$100,000at
the end of the last year, year 10.
(This
security is sometimes referred to as a coupon bond.)
If the
discount rate is
3.5$%per annum, what is the current
price of the bond?

(Hint:
Recognize that this bond can be viewed as two cash flow streams: (1) a 10-year
annuity with annual payments of
$1,000, and (2) a single cash flow of
$100,000arriving
10 years from today. Apply the tools you’ve learned to value both cash flow
streams separately and then add.)

*Make sure
to input all currency answers without any currency symbols or commas, and use
two decimal places of precision.
3.
Problem 3.
Paying for School
Your
daughter will start college one year from today, at which time the first
tuition payment of$58,000must be made. Assuming that
tuition does not increase over time and that your daughter remains in school
for four years, how much money do you need today in your savings account,
earning
5%per annum, in order to make the
tuition payments over the next four years ?

*Make sure
to input all currency answers without any currency symbols or commas, and use
two decimal places of precision.

4.
Problem 4.
Perpetuities
Imagine
that the government decided to fund its current deficit of
$431billion dollars by issuing a
perpetuity offering a
4%annual return. How much would
the government have to pay bondholders each year in perpetuity? Express your
answer in billions of dollars.

(Hint: The$431billion
is just the present value of these cash flows at a discount rate of4%.)

*Make sure
to input all currency answers without any currency symbols or commas, and use two
decimal places of precision.

 

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