Think of a $1,000 bond with a 6% ($60) coupon that matures several years into th

Question

Think of a $1,000 bond with a 6% ($60) coupon that matures several years into the future. If you manage to buy it for $850, the bond's CURRENT yield is approximately:

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Question 412 pts

This is the first question for which you may need to use the time value of money tables (or a calculator): Think of an automobile currently priced at $20,000. If price of cars increases 5% per year, what will be the approximate price of an equivalent vehicle 5 years from now. (Hint the inflation rate can be treated as an interest rate.)

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Question 422 pts

Suppose that you plan to invest $1200 at the end of each of the next 9 years and you want to have accumulated $15,600 at the end of this period, what rate of return (to the nearest percent) would you need to achieve? (Hint: this is what I called an A=BxC problem in which you know A and B.)

Explanation / Answer

1.) Current Price =$850

Let us assume the coupon is paid annually and it will be paid for infinite years,

Annual Coupon =$60

60/r = 850

r=60/850

Hence, the rate is 7%

2.) Curent vehicle price = $20,000

Annual Increase =5%

Price after 5 years =1.055 x 20,000 =$25,525.63

So, approximate price will be $25,500

3.) Amount at the end of period =$15,600

Principal invested each year =$1,200

Time =9 years

Let rate of return be r

15,600 = 1,200 x {((1+r)9-1)/r}

13 = {((1+r)-9-1)/r}

Using Trial and Error method, we can evaluate the value of r

r = 13.96%

Hence, the rate of interest is 13.96%

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