Question

As per The Economist (June 24, 2017), the Argentinian

government issued its first 100‐year bond, with cash flows
denominated in dollars. The bond thus now matures in,

for simplification purposes, 97 years. The current bond has a
$1,000 face value and the following monthly, end‐ofmonth

coupon payments: $10/ month for 47 years, $30/month for 20 years,
and then $50/month for 30 years. As

Argentina has defaulted on its bonds six times in the past 100
years, you decide that a 18%/year required return is an

appropriate (geometric) average required return over the entire
horizon. Thus, use a required return of 18%/year

and answer the following questions.

You might recognize that this bond’s series of cash flows consists
of three annuities and a single face‐value cash flow

at maturity. I will refer to the annuities, in chronological order,
as Annuity A, Annuity B, and Annuity C. Importantly, I

do not want you to do any calculations here. Rather, I am asking
questions about the right approach to ultimately

valuing this annuity.

(a1) The equations for present value of an ordinary annuity are [in
math] C / r ∙ ( 1 – 1/(1+r)N ) and [in Excel] –PV(rate,

nper,pmt,,0). State the values that you would use for C (pmt), r
(rate), and N (nper) for Annuity A. (a2) State the values

that you would use in the present‐value equation for C (pmt), r
(rate), and N (nper) for Annuity B. You do not

need to calculate this present value; just call the answer X (or ⌂
or !!! or gazillion). (a3) State the values that you

would use in the present‐value equation for C (pmt), r (rate), and
N (nper) for Annuity C. You do not need to calculate

this present value; just call the answer Z (or ⌂ or !!! or
gazillion). (b1) Write the simple math equation for
transforming

X (from part a2) into a value today. (b2) Write the simple math
equation for transforming Z (from part a3)

into a value today. (b3) Write the simple math equation for
transforming the $1,000 face‐value payment into a value

today. [Suggestion: A timeline might be very helpful as you
organize your work.]

Answer #1

Annuity A:

N= 47

rate(r) =18%

pmt= 10

FV = 0

calculate for PV, it will be 55.5323

Annuity B

N= 20

rate(r) =18%

pmt= 30

FV = 0

calculate for PV, it will be 160.5824

But as we are discounting it to only 20 years it will be at 47th year.

Hence to get the present value we need to discount it by 1.18^47.

final PV = 160.5824/1.18^47= 0.0667

Annuity C

N= 30

rate(r) =18%

pmt= 50

FV = 1000

calculate for PV, it will be 282.8152

But as we are discounting it to only 30 years it will be at the 67th year.

Hence to get the present value we need to discount it by 1.18^67.

final PV = 282.8152/1.18^67= 0.00431

**PV of the bond = 55.5323 + 0.0667 + 0.00431
=55.60381**

Additionally, I have attached one timeline so that students can check why annuity b and c were discounted by respective years.

Additionally, I have added excel calculation below for more clarity:

0 | pv | ||

1 | 10 | 8.474576 =(10/1.18^1) | |

2 | 10 | 7.181844 = (10/1.18^2) | |

3 | 10 | 6.086309 | |

4 | 10 | 5.157889 | |

5 | 10 | 4.371092 | |

6 | 10 | 3.704315 | |

7 | 10 | 3.13925 | |

8 | 10 | 2.660382 | |

9 | 10 | 2.254561 | |

10 | 10 | 1.910645 | |

11 | 10 | 1.61919 | |

12 | 10 | 1.372195 | |

13 | 10 | 1.162877 | |

14 | 10 | 0.985489 | |

15 | 10 | 0.83516 | |

16 | 10 | 0.707763 | |

17 | 10 | 0.599799 | |

18 | 10 | 0.508304 | |

19 | 10 | 0.430766 | |

20 | 10 | 0.365056 | |

21 | 10 | 0.30937 | |

22 | 10 | 0.262178 | |

23 | 10 | 0.222185 | |

24 | 10 | 0.188292 | |

25 | 10 | 0.159569 | |

26 | 10 | 0.135228 | |

27 | 10 | 0.1146 | |

28 | 10 | 0.097119 | |

29 | 10 | 0.082304 | |

30 | 10 | 0.069749 | |

31 | 10 | 0.05911 | |

32 | 10 | 0.050093 | |

33 | 10 | 0.042452 | |

34 | 10 | 0.035976 | |

35 | 10 | 0.030488 | |

36 | 10 | 0.025837 | |

37 | 10 | 0.021896 | |

38 | 10 | 0.018556 | |

39 | 10 | 0.015725 | |

40 | 10 | 0.013327 | |

41 | 10 | 0.011294 | |

42 | 10 | 0.009571 | |

43 | 10 | 0.008111 | |

44 | 10 | 0.006874 | |

45 | 10 | 0.005825 | |

46 | 10 | 0.004937 | |

47 | 10 | 0.004184 | |

48 | 30 | 0.010636 | |

49 | 30 | 0.009014 | |

50 | 30 | 0.007639 | |

51 | 30 | 0.006473 | |

52 | 30 | 0.005486 | |

53 | 30 | 0.004649 | |

54 | 30 | 0.00394 | |

55 | 30 | 0.003339 | |

56 | 30 | 0.00283 | |

57 | 30 | 0.002398 | |

58 | 30 | 0.002032 | |

59 | 30 | 0.001722 | |

60 | 30 | 0.001459 | |

61 | 30 | 0.001237 | |

62 | 30 | 0.001048 | |

63 | 30 | 0.000888 | |

64 | 30 | 0.000753 | |

65 | 30 | 0.000638 | |

66 | 30 | 0.000541 | |

67 | 30 | 0.000458 | |

68 | 50 | 0.000647 | |

69 | 50 | 0.000548 | |

70 | 50 | 0.000465 | |

71 | 50 | 0.000394 | |

72 | 50 | 0.000334 | |

73 | 50 | 0.000283 | |

74 | 50 | 0.00024 | |

75 | 50 | 0.000203 | |

76 | 50 | 0.000172 | |

77 | 50 | 0.000146 | |

78 | 50 | 0.000124 | |

79 | 50 | 0.000105 | |

80 | 50 | 8.88E-05 | |

81 | 50 | 7.53E-05 | |

82 | 50 | 6.38E-05 | |

83 | 50 | 5.4E-05 | |

84 | 50 | 4.58E-05 | |

85 | 50 | 3.88E-05 | |

86 | 50 | 3.29E-05 | |

87 | 50 | 2.79E-05 | |

88 | 50 | 2.36E-05 | |

89 | 50 | 2E-05 | |

90 | 50 | 1.7E-05 | |

91 | 50 | 1.44E-05 | |

92 | 50 | 1.22E-05 | |

93 | 50 | 1.03E-05 | |

94 | 50 | 8.75E-06 | |

95 | 50 | 7.42E-06 | |

96 | 50 | 6.28E-06 | |

97 | 1050 | 0.000112 | |

55.60381 | PV of BOND |

I was looking at the solution to the following question on this
site. I could not understand why use 12 when working out the NPER.
Since the monthly payments start 1 month after should you not use
11?
Question 3. (a) A family member is thinking about
funding his granddaughter’s university education in 8 years when
she is expected to enrol at UWI, St. Augustine. He opens a special
savings account, where he can receive a lump sum in 8...

One year ago, you purchased an 8% coupon rate bond when it was
first issued and priced at its face value of $1,000. Yesterday the
bond paid its second semi-annual coupon. The bond currently has 7
years left until maturity and has a yield to maturity of 12%. If
you sell the bond today, what will your return have been from this
investment during the year you held the bond and collected the
coupon payments?
a. -10.6%
b. -1.9%
c....

Rick bought a 20-year bond when it was issued by Macroflex
Corporation 5 years ago (NOTE: the bond was issued 5 years ago. In
calculating price today, remember it has only 15 years remaining to
maturity). The bond has a $1,000 face value, an annual coupon rate
equal to 7 percent and the coupon is paid every six months. If the
yield on similar-risk investments is 5 percent,
a. What is the current market value (price) of the bond?
b....

Suppose you earned a $435,000 bonus this year and invested it at
8.25% per year. How much could you withdraw at the end of each of
the next 20 years?
Select the correct answer.
a. $45,114.15
b. $45,123.65
c. $45,133.15
d. $45,152.15
e. $45,142.6
Suppose you just won the state lottery, and you have a choice
between receiving $3,550,000 today or a 20-year annuity of
$250,000, with the first payment coming one year from today. What
rate of return is...

Five years ago, the State of Oklahoma issued $2,000,000 of 7%
coupon, 20-year semiannual payment, tax-exempt bonds. The bonds had
5 years of call protection, but now the state can call the bonds if
it chooses to do so. The call premium would be 5% of the face
amount. Today 15-year, 5%, semiannual payment bonds can be sold at
par, but flotation costs on this issue would be 2%. What is the net
present value of the refunding? Because these...

Mandy would like to buy an apartment and needs a mortgage for
$280,000. She was able to qualify for a loan at 7.2% for 30 years.
What is the amount of her monthly payment?
Use a spreadsheet program like Microsoft Excel. Start with a
blank worksheet.
In your spreadsheet, create a TVM DataFrame
TVM DataFrame
c
n
i
PV
PMT
FV
1
From the problem, fill-in the values for Mandy's mortgage
annuity into your spreadsheet. Place a question mark in...

a) First, consider a 10 year bond with a coupon rate of 7% and
annual coupon payments. Draw a graph showing the relationship
between the price and the interest on this bond. The price should
be on the y- axis and the interest rate on the x-axis. To compute
the various prices, consider interest rates between 2% and 12% (use
0.5% increments). So your x-axis should go from 2%, then 2.5% ...
until 11.5% and then 12%.
Is the relationship...

1. A Treasury bond has a 10% annual coupon and a 10.5%
yield to maturity. Which of the following statements is CORRECT?
*
a. The bond sells at a price below par.
b. The bond has a current yield less than 10%.
c. The bond sells at a discount.
d. a & c.
e. None of the above
2. J&J Company's bonds mature in 10 years, have a par value of
$1,000, and make an annual coupon interest payment of...

Now you will plan for your retirement. To do this we need to
first determine a couple of values. a. How much will you invest
each year? Even $25 a month is a start ($300 a year), you’ll be
surprised at how much it will earn. You can choose a number you
think you can afford on your life circumstances or you can dream
big. State what you will use for P, r, and n to earn credit.
b. Determine...

In
your answers, you should properly show your work by writing down
your entries into the calculator. For instance, if you use the TVM
worksheet of your financial calculator to compute how long it takes
to double your account balance given 5% annual interest rate, you
should write down your entries as: I/Y=5, PV=-1, PMT=0, FV=2, CPT
N=? --- the question mark here stands for your answer to the
question.
Question 6 – PV, Ordinary Annuity, Compounding [2 points]:
Find...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 10 minutes ago

asked 13 minutes ago

asked 16 minutes ago

asked 19 minutes ago

asked 19 minutes ago

asked 36 minutes ago

asked 38 minutes ago

asked 56 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago