To calculate: The duration of liability after borrowing and lending market interest rate of 7.6 percent.
Duration: It is an object used in
Explanation of Solution
Calculation of duration
Year |
($) |
Relative value | Duration |
7 | 17,965.3360 | 0.2781 | 1.9472 |
8 | 16,696.4094 | 0.2584 | 2.0672 |
9 | 15,517.1091 | 0.2402 | 2.1618 |
10 | 14,421.1051 | 0.2233 | 2.2320 |
Total present value | 64,599.9596 | 1 | 8.4082 |
Table (1)
Working notes:
Calculation of present value for year 7,
Calculation of present value for year 8,
Calculation of present value for year 9,
Calculation of present value for year 10,
Calculation of relative value for year 7,
Calculation of relative value for year 8,
Calculation of relative value for year 9,
Calculation of relative value for year 9,
Calculation of duration year 7,
Calculation of duration year 8,
Calculation of duration year 9,
Calculation of duration year 10,
So duration of bond is 8.4082 years.
Want to see more full solutions like this?
Chapter 25 Solutions
EBK CORPORATE FINANCE
- A couple with a newborn son wants to save for their child's college expenses in advance. The couple can establish a college fund that pays 8% annual interest. Assuming that the child enters college at age 18, the parents estimate that an amount of $50,000 per year will be required to support the child's college expenses for four years. Determine the equal annual amounts that the couple must save until they send their child to college. (Assume that the first deposit will be made on the child's first birthday and the last deposit on the child's 18th birthday. The first withdraw will be made at the beginning of the freshman year, which also is the child's 18th birthday.) O $4,775.80 O $6,016.13 O $6,138.52 O $4,609.37arrow_forward12) Anticipating college tuition for their child in 12 years, the Earlibees want to deposit a lump sum of money into an account that will provide $100,000 at the end of the twelve-year period. The account selected pays 7%, compounded monthly. How much should they deposit?arrow_forwardAlex will need $9860 per year for four years to support his daughters university tuition (first tuition is paid at the beginning of the 11th year). How much will Alex have to invest at the beginning of each year for the 10 years before his daughter begins her studies if their savings earn compound interest at 6 percent per year? A)$2,378.49 B)$2,593.46 C)$2,697.47 D)$2,400.74 E)$2,544.78arrow_forward
- if her dad deposits R3570,00 at the end of every six months for the next four years into a bank account. The account pays 8,5% interest per annum, compounded semi-annually. Her father pays and additional R5550,00 into the account for every R3570,00 deposit he makes. The first deposit will be made six months from now. How much money will there be in the account for Aziz to pay for her college expenses?arrow_forwardYou anticipate your child will start college in 18 years. You decide to place $4,732 each year into a 4.1% interest bearing account. How much will be in the account when he begins college?arrow_forwardA client's child will be attending college in 7 years. Assume current tuition and fees are $37, 294, and inflation for college costs averages 1.96 percent. She can earn 9.94 percent on the money she invests for this purpose. The client wants to know how much she will need to set aside today to pay the first year's tuition and fees.arrow_forward
- On a child's first birthday, a parent wishes to deposit enough money so that the child can withdraw $5000 per year for five years. If the first withdrawal will be on the child's 18th birthday, how much should the parent deposit? The rate is 5% annually.arrow_forwardGrandparents plan to open an account on their grandchild's birthday and contribute each month until she goes to college. How much must they contribute at the beginning of each month in an investment that pays 5%, compounded monthly, if they want the balance to be $160,000 at the end of 18 years?arrow_forwardJenny and Leo plan to purchase a new house and the couple is able to obtain a 25-year 3.6% (per annum, compounded monthly) amortised loan but they must put down 20% deposit. The loan requires end-of-month repayments of $2,500 where the first payment is due a month after the loan is taken. Assuming that the couple has enough savings for the down payment, what is the cost of the house that they want to purchase? a. 494,068.50 b. 2,470,342.49 c. 750,000 Od. 617,585.62arrow_forward
- Maria wants to attend Clarke University. She will need $90,000 eight years from today. Assume Maria's bank pays 6% interest compounded semiannually. What must Maria deposit today to have $90,000 in eight years? verify your answer.arrow_forwardJessica purchases a house for $323,000 and takes a mortgage for the full amount. Her mortgage charges 6.75% per year and interest is compounded monthly. She will repay the loan over 25 years with equal monthly payments. a) What is her monthly payment amount? b) How much of the 8th payment would be applied toward interest? c) How much would be the payoff amount if the mortgage is to be paid at the end of year 2 (i.e., before the 24th payment is made)?arrow_forwardRoberto and Micah plan to purchase a home for $225,000. They will pay 20% down and finance the remainder for 15 years at the APR of 3.7%, compounded monthly. a) How large are the monthly payments? b) What will be their loan balance right after they have made their 180th payment? c) How much interest will they pay during the 15th year of the loan? d) If they were to increase their monthly payments by $100, how long would it take to pay off the loan? Give your answer in whole months.arrow_forward
- Excel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT