Concept explainers
1.
Compute the issue (sale) price on January 1 when the annual market interest rate is 5%.
1.
Answer to Problem 1CCOMP
Particulars | Amount in $ |
Present value (2) | 613,910 |
Present value of annuity (3) | 386,087 |
Issue price | 999,997 |
(Table 1)
Therefore, the issue price on January 1when annual market interest rate is 5% is $999,997.
Explanation of Solution
Present value:
Present value is the current value of an amount that is to be paid or received in future. Present value is determined by using the formula:
Annuity:
An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.
Working Notes:
Compute the issue (sale) price on January 1 when the annual market interest rate is 5%:
2.
Compute the issue (sale) price on January 1 when the annual market interest rate is 4%.
2.
Answer to Problem 1CCOMP
Particulars | Amount in $ |
Present value (4) | 675,560 |
Present value of annuity (5) | 405,545 |
Issue price | 1,081,105 |
(Table 2)
Therefore, the issue price on January 11when annual market interest rate is 4% is $1,081,105.
Explanation of Solution
Present value:
Present value is the current value of an amount that is to be paid or received in future. Present value is determined by using the formula:
Annuity:
An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.
Working Notes:
Compute the issue (sale) price on January 1 when the annual market interest rate is 4%:
3.
Compute the issue (sale) price on January 1 when the annual market interest rate is 6%.
3.
Answer to Problem 1CCOMP
Particulars | Amount in $ |
Present value (6) | 558,390 |
Present value of annuity (7) | 368,005 |
Issue price | 926,395 |
(Table 3)
Therefore, the issue price on January 11when annual market interest rate is 6% is $926,395.
Explanation of Solution
Present value:
Present value is the current value of an amount that is to be paid or received in future. Present value is determined by using the formula:
Annuity:
An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.
Working Notes:
Compute the issue (sale) price on January 1 when the annual market interest rate is 6%:
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Chapter 11 Solutions
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