Answer the following questions assuming the interest rate is 8 percent.
Time Value of Money Problems
Bank Loan, Bond, and Stock Problems
o. How much would you pay for a 10-year bond with a par value of $1,000 and a 7 percent coupon rate? Assume interest is paid annually.
p. How much would you pay for a share of preferred stock paying a $5-per-share annual dividend forever?
q. A company is planning to set aside money to repay $150 million in bonds that will be coming due in eight years. How much money would the company need to set aside at the end of each year for the next eight years to repay the bonds when they come due? How would your answer change if the money was deposited at the beginning of each year?
r. An individual wants to borrow $120,000 from the bank and repay it in six equal annual end-of-year payments, including interest. What should the payments be for the bank to earn 8 percent on the loan? Ignore taxes and default risk.