Question

Consider three bonds with 6.40% coupon rates, all making annual coupon payments and all selling at face value. The

short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years.

a. What will be the price of the 4-year bond if its yield increases to 7.40%? (Round answers to 2 decimal places)

b. What will be the price of the 8-year bond if its yield increases to 7.40%? (Round answers to 2 decimal places) 

c. What will be the price of the 30-year bond if its yield increases to 7.40%? (Round answers to 2 decimal places) 

d. What will be the price of the 4-year bond if its yield decreases to 5.40%? (Round answers to 2 decimal places) 

e. What will be the price of the 8-year bond if its yield decreases to 5.40%? (Round answers to 2 decimal places) 

f.What will be the price of the 30-year bond if its yield decreases to 5.40%? (Round answers to 2 decimal places) 

a. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 6.2%. Now, with 6 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 15%. What is the price of the bond now? (Assume semiannual coupon payments.)

Round your answers to 2 decimal places

b. Suppose that investors believe that Castles can make good on the promised coupon payments but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 90% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Enter your answers as a percentage rounded to 2 decimal places)

 

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Question

A factory costs $500,000. You forecast that it will produce cash inflows of $145,000 in year 1, $205,000 in year

2, and $350,000 in year 3. The discount rate is 10%.

a. What is the value of the factory? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. Is the factory a good investment?

• Yes
• No

a. If you borrow $1,500 and agree to repay the loan in four equal annual payments at an interest rate of 10%, what will your payment be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What will your payment be if you make the first payment on the loan immediately instead of at the end of the first year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

You believe you will need to have saved $460,000 by the time you retire in 40 years in order to live comfortably. If the interest rate is 5% per year, how much must you save each year to meet your retirement goal? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A store will give you a 1.75% discount on the cost of your purchase if you pay cash today. Otherwise, you will be billed the full price with payment due in 1 month. What is the implicit borrowing rate being paid by customers who choose to defer payment for the month? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

a. How much will $100 grow to if invested at a continuously compounded interest rate of 8% for 8 years? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. How much will $100 grow to if invested at an annual interest rate of 8.00% for 8 years? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

In April 2016 a pound of apples cost $1.42, while oranges cost $1.06. Three years earlier the price of apples was only $1.21 a pound and that of oranges was $.92 a pound.

a. What was the annual compound rate of growth in the price of apples? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. What was the annual compound rate of growth in the price of oranges? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. If the same rates of growth persist in the future, what will be the price of apples in 2030? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

d. What about the price of oranges? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

An engineer in 1950 was earning $6,800 a year. In 2015 she earned $88,000 a year. However, on average, prices in 2015 were higher than in 1950. What was her real income in 2015 in terms of constant 1950 dollars? Use the data in Table 5.8. (Round your answer to 2 decimal places.)

 

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