Question

An investor purchases a 6-year, $1,000 par value bond that pays semiannual interest of $12. If the semiannual market rate of interest is 5%, what is the current market value of the bond?

Inc. purchased a multi-color offset press with terms of $65,000 to be paid at the date of purchase, and a noninterest-bearing note requiring payment of $50,000 at the end of each year for three years. The interest rate implicit in the purchase contract is 11%. Inc. would record the asset at:

Nancy James recently won the lottery and needs to decide between the options of receiving the annual cash flow payment option of $350,000 per year for 30 years beginning today, or receiving one lump-sum amount today. Nancy can earn 5% investing this money. At what lump-sum payment amount would she be indifferent between the two alternatives?

Answer 1

1)

Bond price is present value of coupon interest and maturity value:

Bond value = $12[(1-1/1.05^12)/.05] + 1,000/1.05^12

= $12(8.8629)+1,000/1.7958

= 106.35+556.85

= $663.20

2)

Annuity payments	50000
X PV factor @ 11%	2.4437	=(1-(1.11)^-3)/0.11
Present value of Annuity payments	122,185
Add: Cash payment at beginning	65000
Polo would record the asset at	187,185

3)

Present value = Amount*PVADF@5%

= 350000*16.14107

Present value = 5,649,375

Lump sum payment should be equal to $ 5,649,375

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