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Time Value of Money(Future Value, Annuity) , Yield to call

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1) Terry Austin is 30 years old and is saving for her retirement. She is planning on making 36 contributions to her retirement account at the beginning of each of the next 36 years. The first contribution will be made today (t = 0) and the final contribution will be made 35 years from today (t = 35). The retirement account will earn a return of 10 percent a year. If each contribution she makes is $3,000, how much will be in the retirement account 35 years from now (t = 35)?
$894,380
$813,073
$897,380
$987,118
$978,688

2) Your client just turned 75 years old and plans on retiring in 10 years on her 85th birthday. She is saving money today for her retirement and is establishing a retirement account with your office. She would like to withdraw money from her retirement account on her birthday each year until she dies. She would ideally like to withdraw $50,000 on her 85th birthday, and increase her withdrawals 10 percent a year through her 89th birthday (i.e., she would like to withdraw $73,205 on her 89th birthday). She plans to die on her 90th birthday, at which time she would like to leave $200,000 to her descendants. Your client currently has $100,000. You estimate that the money in the retirement account will earn 8 percent a year over the next 15 years.

Your client plans to contribute an equal amount of money each year until her retirement. Her first contribution will come in 1 year; her 10th and final contribution will come in 10 years (on her 85th birthday). How much should she contribute each year to meet her objectives?
$12,401.59
$12,998.63
$13,243.18
$13,759.44
$14,021.53

3) A corporate bond which matures in 12 years, pays a 9 percent annual coupon, has a face value of $1,000, and a yield to maturity of 7.5 percent. The bond can first be called four years from now. The call price is $1,050. What is the bond's yield to call?
6.73%
7.10%
7.50%
11.86%
13.45%

*Please see attachments for multiple choice answers.

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Answers to multiple choice questions on Time Value of Money (Future Value, Annuity) , Yield to Call of bonds

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Compute the present value of a $100 cash flow for the following combinations of discount rates and times. Compute the future value of a $100 cash flow for the same combinations of rates and times. Find the interest rate implied by the following combinations of present and future values. If you take out an $8,000 car loan that calls for 48 monthly payments at an APR of 10 percent, what is your monthly payment? What is the principal balance on the loan? What is the bond's price? If they buy the bond today, what yield to maturity do they expect to receive?

1. Present Values. Compute the present value of a $100 cash flow for the following combinations of discount rates and times:
a. r = 8 percent, t = 10 years.
b. r = 8 percent, t = 20 years.
c. r = 4 percent, t = 10 years.
d. r = 4 percent, t = 20 years.

2. Future Values. Compute the future value of a $100 cash flow for the same combinations of rates and times as in problem 1.

6. Calculating Interest Rate. Find the interest rate implied by the following combinations of present and future values:

Present Value Years Future Value
$400 11 $684
$183 4 $249
$300 7 $300

22. Loan Payments. If you take out an $8,000 car loan that calls for 48 monthly payments at an APR of 10 percent, what is your monthly payment? What is the effective annual interest rate on the loan?

37. Amortizing Loan. You take out a 30-year $100,000 mortgage loan with an APR of 6 percent and monthly payments. In 12 years you decide to sell your house and pay off the mortgage. What is the principal balance on the loan?

38. Amortizing Loan. Consider a 4-year amortizing loan. You borrow $1,000 initially, and repay it in four equal annual year-end payments.
a. If the interest rate is 8 percent, show that the annual payment is $301.92.
b. Fill in the following table, which shows how much of each payment is interest versus principal repayment (that is, amortization), and the outstanding balance on the loan at each date.

Loan Year-End Interest Year-End Amortization
Time Balance Due on Balance Payment of Loan
0 $1,000 $80 $301.92 $221.92
1 ------ ------ 301.92 ------
2 ------ ------ 301.92 ------
3 ------ ------ 301.92 ------
4 0 0 - -

c. Show that the loan balance after 1 year is equal to the year-end payment of $301.92 times the 3-year annuity factor.

3. Bond Yields. A bond with face value $1,000 has a current yield of 7 percent and a coupon rate of 8 percent. What is the bond's price?

4. Bond Pricing. A 6-year Circular File bond pays interest of $80 annually and sells for $950. What are its coupon rate, current yield, and yield to maturity?

18. Bond Prices and Yields. a. Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yield to maturity of 7 percent. Now, with 8 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 15 percent. What has happened to the price of the bond?

b. Suppose that investors believe that Castles can make good on the promised coupon payments, but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 80 percent of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive?

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