Brief Exercise A-3
Liam Company signed a lease for an office building for a period
of 10 years. Under the lease agreement, a security deposit of
$7,300 is made. The deposit will be returned at the expiration of
the lease with interest compounded at 7% per year.
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as
displayed in the factor table provided.)
What amount will Liam receive at the time the lease expires?
(Round answer to 2 decimal places, e.g.
25.25.)
| Amount at the time the lease expires | $ |
Brief Exercise A-14
Dempsey Railroad Co. is about to issue $274,000 of 7-year bonds
paying an 9% interest rate, with interest payable semiannually. The
discount rate for such securities is 10%.
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as
displayed in the factor table provided.)
In this case, how much can Dempsey expect to receive from the sale
of these bonds? (Round answer to 0 decimal places, e.g.
2,525.)
| Dempsey can expect to receive | $ |
Answer 1
Amount will be received after 10 years
Rate is 7%.
Future value of $1 for 10 year @ 7 % = (1.07)10
= 1.96715
Future value of deposit = $7300*1.96715 = $14360.20
Answer 2
| PV of Interest & Principal | |||
| n=14 (7 years*2 times a year) | |||
| r=0.05 (0.10/2) | |||
| Year | Cash Flow | PVF @ 5% | PV |
| 1 to 7 | 12,330 | 9.89864 | $122,050.23 |
| 7 | 274,000 | 0.50506 | $138,386.44 |
| PV of Interest & Principal | $260,437 | ||
| Dempsey can expect to receive $260437 | |||
Since coupon rate is less than market rate, bonds sell at Discount.
( As factor tables were not provided, values were calculated using calculator)
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