Question

2. What is the present value of a security that will pay $13,000 in 20 years if securities of equal risk pay 12% annually? Round your answer to the nearest cent.

3. Your parents will retire in 27 years. They currently have $400,000 saved, and they think they will need $1,700,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they don't save any additional funds? Round your answer to two decimal places.

Answer 1

2.Information provided:

Future value= $13,000

Time= 20 years

Yield to maturity= 12%

Enter the below in a financial calculator to compute the present value:

FV= 13,000

I/Y= 12

N= 20

Press the CPT key and PV to compute the present value.

The value obtained is 1,347.67.

Therefore, the present value of a security of the bond is $1,347.67.

3.The question is solved by calculating the yield to maturity.

Information provided:

Current saving= present value= $400,000

Future value= $1,700,000

Market price= present value= $1,035.68

Time= 27 years

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,700,000

PV= -400,000

N= 27

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 5.5052.

Therefore, the yield to maturity is 5.51%.