1. Calculate the present value of a $1,000 zero-coupon bond with five years to maturity if the yield to maturity is 6%.
2. A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%.
3. Consider a bond with a 7% annual coupon and a face value of $1,000. Complete the following table.
|
Year to Maturity
|
Yield to Maturity
|
Current Price
|
|
3
|
5
|
|
|
3
|
7
|
|
|
6
|
7
|
|
|
9
|
7
|
|
|
9
|
9
|
|
What relationships do you observe between maturity and discount rate and the current price?