Please show all work. THANK YOU 1) Your parents have an investment portfolio of
ID: 2636073 • Letter: P
Question
Please show all work. THANK YOU
1) Your parents have an investment portfolio of $400,000, and they wish to take out cash flows of $50,000 per year as an ordinary annuity. How long will their portfolio last if the portfolio is invested at an annual rate of 5.50%? Use a calculator to determine your answer.
2) Suppose you invest $3,500 today, compounded monthly, with an annual interest rate of 8.50%. What amount of interest will you earn in one year?
3) The Cougar Corporation has issued 20-year semi-annual coupon bonds with a face value of $1,000. If the annual coupon rate is 12% and the current yield to maturity is 10%, what is the firm's current price per bond?
4) Ten years ago Bacon Signs Inc. issued twenty-year 8% semi-annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to maturity on the Bacon bonds is now 7%. Given this information, what is the price today for a Bacon Signs bond?
5) Rogue Racing Inc. has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments. If there are twelve years remaining prior to maturity and these bonds are selling for $896.40, what is the yield to maturity for these bonds?
Explanation / Answer
1) Compute the number of years:
The present value is $400,000, interet rate is 5.5% and annuity payments are $50,000.
Excel formula is used to find the number of years:
Nper = (Rate, PV, PMT, FV)
= (5.5%, 400000, -50000, 0)
= 10.83or 11yrs
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2) Compute the interest amount after one year:
Present value is $3,500, interest rate is 8.5%, number of months is 12.
Monthly rate = 8.5% / 12 = 0.71%
PMT = (Rate, Nper, PV, FV)
= (0.71%, 12, 3500, 0)
= $305.30
Therefore, the interest paid in one year is ($305.30 X 12) = $3,663.62
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3) Calculate the current price of the bond:
Current yield is calculated as annual coupon payment divided by current price of the bond.
Annua coupon payment = Face value X Coupon rate = $1,000 X 12% = $120
Current yield = $120 / Current price
10% = $120 / Current price
Current price = $1200
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4) Use the excel formula to calculate the present value of the bond:
Go to excel and select “fx” and choose “PV” and enter the values in the formula as shown below:
PV = (Rate, Nper, PMT, FV)
= (7%/2, 10 X2, -40, -1000)
= (3.5%, 20, -40, -1000)
= $1071.06
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5) Use the excel formula to calculate the Rate of the bond:
Go to excel and select “fx” and choose “Rate” and enter the values in the formula as shown below:
Rate = ( Nper, PMT,PV, FV)
= (12 X2, -40, 896.40, -1000)
= (24,-40, 896.40, -1000)
= 4.73%
If the semi-annual rate is 4.73% and annual rate is 9.46%
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