## 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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