Assignment: Money and Banking

1. What is the value of 15-year corporate bonds, with a coupon rate of 9%, if current interest rates on similar bonds is 8%? How much would the value change if interest rates increased to 10%? Under what conditions will this bond trade at par (face value)?

2. What is the value of stock in a company that currently pays out $1.50 per share in dividends and expects these dividends to grow 6% a year

forever? (You can assume that investors require a 13% return on stocks of equivalent risk.)

3. You buy a 10-year zero-coupon bond, with a face value of $1000, for $300. What is the rate of return you will make on this bond?

4. You have an expected liability (cash outflow) of $500,000 in 10 years, and you use a discount rate of 10%.

a. How much would you need right now as savings to cover the expected liability?
b. How much would you need to set aside at the end of each year for the next 10 years to cover the expected liability?

5. You are an investment advisor who has been approached by a client for help on his financial strategy. He has $250,000 in savings in the bank. He is 55 years old and expects to work for 10 more years, making $100,000 a year. (He expects to make a return of 5% on his investments for the foreseeable future. You can ignore taxes)

a. Once he retires 10 years from now, he would like to be able to withdraw $80,000 a year for the following 25 years (his actuary tells him he will live to be ninety years old.). How much would he need in the bank 10 years from now to be able to do this?

b. How much of his income would he need to save each year for the next 10 years to be able to afford these planned withdrawals ($80,000 a year) after the tenth year?

c. Assume that interest rates decline to 4% 10 years from now. How much, if any, would you client have to lower his annual withdrawal by, assuming that he still plans to withdraw cash each year for the next 25 years?