Question: 1. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 6.6%. Now, with
1. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 6.6%. 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 13%. What is the price of the bond now? (Assume semiannual coupon payments.) (Do not round intermediate calculations. Round your answer to 2 decimal places.) Bond price = $_______
2. 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 86% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Yield to maturity = _____%
3. If you earn 7% per year on your bank account, how long will it take an account with $115 to double to $230? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
| Number of years _____ 4. An engineer in 1950 was earning $5,000 a year. Today she earns $50,000 a year. However, on average, goods today cost 7.8 times what they did in 1950. What is her real income today in terms of constant 1950 dollars? (Round your answer to 2 decimal places.)
5. In April 2013 a pound of apples cost $1.46, while oranges cost $1.10. Two years earlier the price of apples was only $1.25 a pound and that of oranges was $.96 a pound.
7. A store will give you a 3.50% 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.)
8. A couple will retire in 50 years; they plan to spend about $36,000 a year in retirement, which should last about 25 years. They believe that they can earn 8% interest on retirement savings.
9. Home loans typically involve points, which are fees charged by the lender. Each point charged means that the borrower must pay 1% of the loan amount as a fee. For example, if the loan is for $160,000 and 2 points are charged, the loan repayment schedule is calculated on a $160,000 loan but the net amount the borrower receives is only $156,800. Assume the interest rate is 1.00% per month. What is the effective annual interest rate charged on such a loan, assuming loan repayment occurs over 288 months? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Use a financial calculator or Excel.)
10. You take out a 20-year $290,000 mortgage loan with an APR of 9% and monthly payments. In 11 years you decide to sell your house and pay off the mortgage. What is the principal balance on the loan? (Round the monthly loan payment to 2 decimal places when computing the answer. Round your answer to 2 decimal places.)
11. A local bank advertises the following deal: Pay us $100 at the end of each year for 11 years and then we will pay you (or your beneficiaries) $100 at the end of each year forever.
12. A famous quarterback just signed a $14.0 million contract providing $2.6 million a year for 4 years. A less famous receiver signed a $13.0 million 4-year contract providing $3 million now and $2.5 million a year for 4 years. The interest rate is 8%.
13. Find the interest rate implied by the following combinations of present and future values: (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 2 decimal places)
14. You can buy property today for $3.3 million and sell it in 5 years for $4.3 million. (You earn no rental income on the property.)
15. In 1880 five aboriginal trackers were each promised the equivalent of 50 Australian dollars for helping to capture the notorious outlaw Ned Kelley. In 1997 the granddaughters of two of the trackers claimed that this reward had not been paid. The Victorian prime minister stated that if this was true, the government would be happy to pay the $50. However, the granddaughters also claimed that they were entitled to compound interest.
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16. Compute the future value of a $150 cash flow for the following combinations of rates and times. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
| Future Value | ||
| a. | r = 7%, t = 10 years | $ |
| b. | r = 7%, t = 20 years | $ |
| c. | r = 3%, t = 10 years | $ |
| d. | r = 3%, t = 20 years | $ |
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