Chapter 4: Q.16 (page 134)
A lottery claims its grand prize is \(15 million, payable over five years at \)3,000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 7%.
The present value of annuity is $13,161,633.77
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Interest rates were lower in the mid-1980s than in the late 1970s, yet many economists have commented that real interest rates were actually much higher in the mid1980s than in the late 1970s. Does this make sense? Do you think that these economists are right?
To help pay for college, you have just taken out a \(1,000 government loan that makes you pay \)126 per year for 25 years. However, you don’t have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than 12%? (This is the yield to maturity on a normal \(1,000 fixed-payment loan on which you pay \)126 per year for 25 years.)
Consider a coupon bond that has a \(900 par value and a coupon rate of 6%. The bond is currently selling for \)860.15 and has two years to maturity. What is the bond’s yield to maturity?
In this chapter, we discussed long-term bonds as if there were only one type, coupon bonds. In fact, investors can also purchase long-term discount bonds. A discount bond is sold at a low price, and the whole return comes in the form of a price appreciation. You can easily compute the current price of a discount bond by using the financial calculator at http://www .treasurydirect.gov/indiv/tools/tools_savingsbondcalc.htm.
To compute the values for savings bonds, read the instructions on the page and click on Get Started. Fill in the information (you do not need to fill in the Bond Serial Number field) and click on Calculate.
Do bondholders fare better when the yield to maturity increases or when it decreases? Why?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
