1. Annuity A makes annual year-end payments of $976.50 for each of the next 10 years, while investment B makes annual year-end payments of $600 per year forever. ?Show your work for the following two questions:

a. At what interest rate would you be indifferent between the two investments?

b. At interest rates above/below this break-even rate, which investment would you choose and why?

2. Rob and Laura wish to buy a new home. The price is $300,000 and they plan to put 25% down. New Rochelle Savings and Loan will lend them the remainder at 8% per annum, compounded semi-annually for a 25-year term. The monthly payments are to begin in one month.
a. How much will their monthly payments be?

b. Assuming they pay off the loan over the 25-year period as planned, what will be the total cost (principal + interest + down payment) of the house?

c. What will the outstanding balance of the loan be after 10 years, assuming they make the first 120 payments on time?

d. Suppose they want to pay off the loan in 15 years. How much extra must they pay each month to do so?

e. Show the first six months in the amortization table for the 25-year mortgage.

3. You are making plans for your retirement. You have just turned 30 and want to retire on your 65th birthday. At that time, you plan to move to the Caribbean, where you believe you can live comfortably on $200,000 per year. You also understand that inflation can impact your enjoyment of retirement so you would like the annual payments you receive to increase at a rate of 5% per annum. Your first payment of $200,000 will occur at age 66. You intend to live in the Caribbean until your 85th birthday, when you will receive your last installment from your retirement fund, move back to Canada, and freeload off your kids. You would also like to save enough money so that you can buy a new car when you are 35, and pay for a big retirement party when you are 65. You figure you will need to have $35,000 for the car and $10,000 for the party.

You estimate that you can earn an average return of 10% per annum on any money you invest over the next 60 years. You have just begun working and plan on saving $11,000 per year until you are 35 years old. You will make your first deposit one year from now. To ensure that you are able to achieve your objectives, you must first answer the following questions:

a. How much will you have to accumulate before you retire?

b. How much will you have to save yearly, from your 36th to your 65th birthday, in order to accumulate the amount from part (a) and also pay for your retirement party?

4. A bond is currently selling at 0.85 on its par value of $1,000. This bond has a maturity of 10 years and a coupon rate of 8%, payable semi-annually. If the inflation rate is 5%, what is the real yield on this bond?

5. The bonds of Microhard, Inc. carry a 12% annual coupon, have a $1,000 face value, and mature in 4 years. Bonds of equivalent risk yield 10%. Microhard is having cash flow problems and has asked its bondholders to accept the following deal:

The firm would like to make the next three coupon payments at half the scheduled amount, and make the final coupon payment be $300. If this plan is implemented and investors still demand a 10% return, what will happen to the market price of the bond?

6. J&J Enterprises wants to issue eighty 15-year, $1,000 zero-coupon bonds. If each bond is priced to yield 9%, how much will J&J receive (ignoring issuance costs) when the bonds are first sold?

7. McGonigal's Meats, Inc. currently pays no dividends. The firm plans to begin paying dividends in 3 years (at the end of t3). The first dividend at that time will be $1 and dividends are expected to grow at 5% per annum thereafter.

Given shareholders demand a 12% return on their investments, what is the price of the stock today (t0)?

8. Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of 4 years (t4) the growth rate will drop to a steady 5%. Oly recently paid a dividend of $1 per share. If the required return is 20%, what is the value of one Oly share today (t0)? ?(Assume dividends grow at the same rate as earnings after year 4.)

9. Bradley Broadcasting expects to pay dividends of $1.12, $1.25, and $1.40 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 5% forever (so, t4 to ∞). Stocks of similar risk yield 12%.

a. What should the price of Bradley Broadcasting stock be today?

b. What is growth rate of the Bradley Broadcasting dividend during year 2?

c. How much is Bradley's stock price expected to increase during the first year?

d. What is the expected capital gains yield on Bradley Broadcasting stock during year 8?