Question

1. Make the following TVM calculations. Present Value a. A trust fund is being set up by a single payment P so that in 10 years, there will be $25,000. If the fund earns interest at the rate of 8% compounded annually, how much money should be paid into the fund initially? Pricing a Bond b. Dr. No from Workouts 11.9 is considering the purchase of a bond, serial number 007. The bond pays a coupon of $200 tomorrow morning, $200 next year and $200 in two years. After the third payment the bond is retired at a face value of $2000. His discount rate (interest rate) is 5 percent. Calculate the maximum amount that Dr. No should pay for this bond. Pricing an Annuity C. The interest rate is 5%. What is the January 1st present value of an annuity that pays $1,000 each year end for 3 years?

Answer 1

a. P = F / (1+i)^T

Present amount to be invested = 25000 / (1+0.08)^10 = 25000 / 1.08^10 = 11579.84

b.

Present value of bond = 200 + 200 *(P/A, 5%,2) + 2000 * (P/F 5%,2)

= 200 + 200 * 1.859410 + 2000 * 0.907029

= 2385.94

c.

Present value = 1000 * (P/A, 5%,3) = 1000 * 2.723248 = 2723.25