1-If someone pays you $500 a year for 5 years at 5% what will it be valued at on

ID: 2741868 • Letter: 1

Question

1-If someone pays you $500 a year for 5 years at 5% what will it be valued at on the last payment?

2-If someone pays you $500 a year for 5 years and someone pays you $1800 to take over them. What is the rate?

3-If a bond is $4 last year and the growth rate is 6% and shareholders rate is 15% what is the value of the stock?

4-If a bond is 6% coupon and the rate is 4% what is the durations?

5-Six year 6% coupon bond that he’s earning 8%. Find the price?

6-Find a fair two year rate (based on expectations theory) if the one year rate is currently 4% and expected to increase to 5% next year.

Answer 1.

If someone will pay $500 a year for next 5 years at 5%, the vlue at the end of 5 years is

Value = 500*1.05^4 + 500*1.05^3 + 500*1.05^2 + 500*1.05 + 500

Value = $2,762.82

Answer 2.

The present Value of all payment of $500 must be equal to $1,800.

1,800 = 500/(1+i) + 500/(1+i)^2 + 500/(1+i)^3 + 500/(1+i)^4 + 500/(1+i)^5

i = 12.05%

Answer 3.

Shareholder rate = 15%

Growth rate = 6%

D0 = $4

D1 = 4*1.06 = $4.24

P = D1/(r-g)

P = 4.24/(0.15-0.06)

P = $47.11

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