a. Suppose that I receive a payment of $20,000 in three years. If interest rates

ID: 1188649 • Letter: A

Question

Suppose that I receive a payment of $20,000 in three years. If interest rates are 2%, then what is the present value today of the future payment?

A simple discount bond pays $4000 in one year. Find the yield to maturity when the price of the bond is

i. $3800

ii. $3900

iii. $4000

What happens to the yield to maturity as the price of the bond increases?

c. How much would investors be willing to pay for a perpetuity that that pays $2000 per year if interest rates are 5%?

I would like the answers but more importantly i would really like to know how to do these problems.

a) PV = 20000/(1+0.02)^3 = 18846.44669

b) i)yield to maturity = 4000/3800 -1 = 5.26%

ii) 4000/3900 - 1 = 2.56

iii) 4000/4000 - 1 = 0

as the bonds price increases,, the yield to maturity decreases

c) PV = 2000/0.05 = 40000

the investors are willing to pay 40000

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