QUESTION 8 \'Let\'s Get Funcky insurance company has issued Consol bonds with pe

Question

QUESTION 8 'Let's Get Funcky insurance company has issued Consol bonds with perpetual coupon payments of $92. Ife required rate of return on these bonds is 4.8%, at what price were they sold? QUESTION 9 At a rate of 7.1%, what is the future value in year 7 of the following cashflow stream. The first cash flow of $1,115 occurs at year 1, the second cash flow of $876 occurs at year 4, and the last cash flow of $508 occurs at year 7. QUESTION 10 You have $2,024 in an account which pays 4% nominal interest. How many ADDITIONAL dollars of interest would you earn over a 5-year period if you moved the money to an account that earns 8% APR?

Explanation / Answer

price = coupon /rate

         = 92 / .048

          =$ 1916.67

9)Assuming ordinary annuity

Future value at year7 =[FVF7.1%,6*CF1]+[FVF 7.1%,3*CF4]+[FVF7.1%,0*CF7]

       =[1.50917*1115]+[1.22848*876]+[1*508]

       = 1682.72+ 1076.15+ 508

      = 3266.87

10)Additional amount of interest earned = [FVF8%,5*amount ]-[FVF 4%,5* Amount]

        = [1.46933*2024]-[1.21665*2024]

     = 2973.92-2462.50

    = 511.42

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