A financial adviser has just given you the following advice: “Long –term bonds are a great investment because their interest rate is over 20%.” Is the financial adviser necessarily right?
1.A financial adviser has just given you the following advice: “Long –term bonds are a great investment because their interest rate is over 20%.” Is the financial adviser necessarily right?
2.Calculate the present value of a $1,000 zero-coupon bond with five years to maturity if the yield to maturity is 6%.
3.A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand price really worth? Use an interest rate of 6%.
4.Consider a coupon bond that has a $1,000 par value and a coupon rate of 10%. The bond is currently selling for $1,150 and has 8 years to maturity. What is the bond’s yield to maturity?
5.You are willing to pay $15,625 now to purchase a perpetuity which will pay you and your heirs $1,250 each year, forever, starting at the end of this year. If your required
6.What is the price of perpetuity that has a coupon of $50 per year and a yield to maturity of 2.5%? If the yield to maturity doubles to 5%, what will happen to its price?
7.Property taxes in DeKalb County are roughly 2.66% of the purchase price every year. If you just bought a $100,000 home, what is the PV of all the future property tax payments? Assume that the house remains worth $100,000 forever, property tax rates never change, and that a 9% discount rate is used for discounting.
8.Assume you just deposited $1,000 into a bank account. The current real interest rate is 2% and inflation is expected to be 6% over the next year. What nominal interest rate would you require from the bank over the next year? How much money will you have at the end of one year? If you are saving to buy a stereo that currently sells for $1,050, will you have enough to buy it?
9.A 10-year, 7% coupon bond with a face value of $1,000 is currently selling for $871.65. Compute your rate of return if you sell the bond next year for $880.10.
10.Calculate the duration of a $1,000 6% coupon bond with three years to maturity. Assume that all market interest rates are 7%.
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