Fin 571 Week 2 Problem Sets

Week 2: Problem Sets

Solution:

Cash flow= $1000 x 7.4/100 = $74

PV = (1/r)x(1- 1/(1+r)^N) = 6.45

PV = $74x6.45= 474.90

Cash flow= $1000

PV factor = 1/(1+r)^N = .42241

PV = $1000x.42241= 422.41

FV= 474.90+422.41 = $897.31

Answer = $897.31

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Solution:

P0 =D1/(r-g) = $5.6/(.10-.06)= $140

Answer = $140

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Solution:

Required Return= D/P= $3.38/$45.25 = .0747= 7.47%

Answer = 7.47%

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Solution:

P =D/r = $1/.03= $33.33

Answer = $33.33

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Solution:

a.

Bond 1. n = 1 x 2 = 2 r = 8% / 2 = 4% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000

PV = -$1,010.61

Bond 2. n = 7 x 2 = 14 r = 8% / 2 = 4% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000

PV = -$1,059.42

Bond 3. n = 15 x 2 = 30 r = 8% / 2 = 4% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000

PV = -$1,097.27

Answer = -$1,010.61, -$1,059.42, -$1,097.27

b.

Bond 1. n = 1 x 2 = 2 r = 7% / 2 = 3.5% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000

PV = -$1,020.18

Bond 2. n = 7 x 2 = 14 r = 7% / 2 = 3.5% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000

PV = -$1,116.03

Bond 3. n = 15 x 2 = 30 r = 7% / 2 = 3.5% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000

PV = -$1,195.42

Answer = -$1,020.18, -$1,116.03, -$1,195.42

c.

Bond 1. n = 1 x 2 = 2 r = 9% / 2 = 4.5% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000

PV = -$1,001.17

Bond 2. n = 7 x 2 = 14 r = 9% / 2 = 4.5% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000

PV = -$1,006.39

Bond 3. n = 15 x 2 = 30 r = 9% / 2 = 4.5% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000

PV = -$1,010.18

Answer = -$1,001.17, -$1,006.39, -$1,010.18

d. Interest-rate risk varies...