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problem1. You bought one of the Bergen Manufacturing Co.’s 10 percent coupon bonds one year ago for $750. These bonds create yearly payments and mature 8 years from now. Assume you decide to sell your bonds today, when the required return on bonds is 11 percent. If the inflation rate was 3 percent over the past year, your total real return on investment was what?

problem2. You have your choice of two investment accounts. Investment A is a 5-year annuity which features end of month $2,500 payments and has interest rate of 11.5 percent compounded monthly. Investment B is 10.5 percent continuously compounded lump sum investment, also better for five years. How much would you require investing in B today for it to be worth as much as investment A five years from now?

problem3. What is value of perpetuity that pays $100 every 4 months forever? The discount rate quoted on APR basis is 6.1%.

problem4. Your holiday ski vacation was great however it unfortunately ran a bit over budget. All is not lost. You just got an offer in the mail to transfer your $5,000 balance from your current credit card, which charges the annual rate of 18.7 percent, to a new credit card charging a rate of 9.4 percent. You plan to make payments of $510 a month on this debt. How many less payments will you have to make to pay off this debt if you transfer the balance to new card?

Financial Accounting, Accounting

  • Category:- Financial Accounting
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