1. You purchase a 20 year bond , $1,000 par value bond that pays 8% interest semi-annually that can be called in 10 years at a price of 105. If the YTC is 7%, how much should you pay for the callable bond?
Bonus:
If this was not a callable bond, what should you pay for the bond if market rate is 7%?
2. Your parents are giving you $100 at the end of each month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?
3. In six years, your daughter will be going to college. You wish to have a fund that will provide her $10,000 per year (end of year) for each of her four years in college. How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years?
4. The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years. What is the future value of this lottery if you plan to put each payment in an account earning 9 percent?
5. Two-years ago, Trans-Atlantic Airlines sold a $250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1000 denominations with an original maturity of 12 years and a coupon rate of 12%. Evaluate the value today of one of these bonds to an investor who requires a 14% rate of return on these securities.
6. Roy, who has just turned 40, would like to have an annual annuity of $20,000 paid over a 20 year period, the first payment occurring on his 66th birthday. How much must Roy save each year (end of year) for the next 25 years to have this annuity, if the investment will earn 12 percent compounded annually?