Question

5. Consider a newlywed who is planning a wedding anniversary gift of a trip to Dubai for her husband at the end of 10 years. She will have enough to pay for the trip if she invests $5,000 per year until that anniversary and plans to make her first $5,000 investment on their first anniversary. Assume her investment earns an 8 percent interest rate, how much will she have saved for their trip if the interest is compounded in each of the following ways? a. Annually b. Quarterly c. Monthly 8. Your choice of vehicle is the Honda CRV, which you plan to purchase in 5 years time after you have completed your studies. You plan to save a certain sum of money every quarter for the next 5 years, and the bank offers you a rate of 8% per annum on your savings. How much do you need to save every quarter to meet the price of your vehicle which is $150, 000. 10. The face value for Karen’s Limited bonds is $100,000 and has a 2 percent annual coupon. The 2 percent annual coupon bonds matures in 2022, and it is now 2012. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. How much should Karen sell her bonds today?

Answer 1

5) Future Value can be calculated using FV function on a calculator

N = 10, PMT = 5,000, PV = 0, I/Y = 8%

=> Compute FV = $72,432.81 with annual compounding... a)

Effective annualized rate with quarterly compounding, EAR = (1 + 8%/4)^4 - 1 = 8.24%

If I/Y = 8.24% => FV = $73,274.78... quarterly compounding... b)

Similarly, EAR = (1 + 8%/12)^12 - 1 = 8.30%

=> If I/Y = 8.30% => FV = $73,472.74... monthly compounding.... c)

8) Savings can be calculated using PMT function

N = 5 x 4 = 20, I/Y = 8%/4 = 2%, FV = 150,000, PV = 0

=> Compute PMT = $6,173.51

10) Bond Price can be calculated using PV function

N = 10, I/Y = 12%, PMT = 2% x 1000 = 20, FV = 1000

=> Compute PV = $434.98