Question

1. What is the PV of an ordinary annuity with 5 payments of $3,400 if the appropriate interest rate is 4.5%? Answer just the dollar amount without the + or - sign. Round to the nearest dollar.

2. A public company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 7.5% on these bonds. What is the bond's price?

Answer just the dollar amount without the + or - sign. Round to the nearest dollar.

3. Suppose you are signing a loan contract of $10,000 for 1 year. You must make interest payments of $230.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

Answer just the number without the % sign. Round to two decimal places.

4. You are saving for a remodeling project 3 years from now, and you plan to save $6,800 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd and last deposit?

Answer just the dollar amount without the + or - sign. Round to the nearest dollar.

Answer 1

1. Use PV function in EXCEL to find the Present value

=PV(rate,nper,pmt,fv,type)

rate=4.5%

nper=5 years

pmt=3400

fv=0

type=0 (ordinary annity:payments at the end of the year)

=PV(4.5%,5,3400,0,0)=$14,925.92

2. Use PV function

=PV(rate,nper,pmt,fv,type)

rate=7.5%

nper=8 years

pmt=65

fv=face value=1000

=PV(7.5%,8,65,1000,0)=$941.43

Price of the bond=$941.43

3. Use RATE function in EXCEL

=RATE(nper,pmt,pv,fv,type)

nper=4 quarters

pmt=230

pv=10000

fv=10000

=RATE(4,230,-10000,10000,0)=2.3%

Effective annual rate=((1+2.3%)^4)-1=1.0952=9.52%

4. Use FV function

=FV(rate,nper,pmt,pv,type)

rate=5.2%

nper=3 years

pmt=6800

pv=0

=FV(5.2%,3,-6800,0,0)=$21,479.19