You invest the exact sum of Rs. 113,000.62 today (“t=0”) in a bank account that pays interest at a stated rate (APR) of 4% per year. This is a rate quoted with semi-annual compounding: the bank credits interest to your account every 6 months.

One year from now (i.e. after two six-month periods or at t=2), soon after the second interest credit has been posted to your account, you withdraw Rs. 5,000. Two years from now (i.e after four six-month periods or at t=4), soon after the fourth interest is credited, you withdraw Rs. 5,000. You continue with this policy of “withdrawal-every-year-soon-after-interest-credit” over the subsequent 17 years, i.e. up to and including t=38, making a total 19 annual withdrawals of Rs. 5,000 each. [Note that “t” here measures the number of semi-annual periods].

If you then close your account 20 years from now (t=40), what is the maximum amount you can withdraw as a closing 20th withdrawal?

 A bond with 20 years to maturity, face value Rs. 1,000 and coupon rate 5% per year, paying annual coupons sells at a price of Rs. 1,130.10. What is the bond’s YTM quoted as an annual effective return (i.e. as an EAR)?

Answer rating: 100% (QA)

We first find the future value of the account after 20 years given the initial deposit the interest ... View the full answer