Problem 1:-
You have a loan outstanding. It requires making three annual payments at the end of the next three years of $1,000 each. Your bank has offered to allow you to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years.
If the interest rate on the loan is 5%, what final payment will the bank require you to make so that it is indifferent between the two forms of payment?
- Annual payment: -$1,000
- Interest rate: 5.00%
- Number of payments: 3
Requirement:-
Calculate the future value of the three year annuity.
Problem 2:-
Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%. You hold the bond for five years before selling it.
a. If the bond's yield to maturity is 6% when you sell it, what is the internal rate of return of your investment?
b. If the bond's yield to maturity is 7% when you sell it, what is the internal rate of return of your investment?
c. If the bond's yield to maturity is 5% when you sell it, what is the internal rate of return of your investment?
- Years to maturity: 30
- Years held : 5
- Coupon : $0
- Par value : $1,000
- Yield to maturity : 6%
Price at original issue
Years left to maturity
a. If the bond's yield to maturity is 6% when you sell it, what is the internal rate of return of your investment?
Price when sold
Internal rate of return
b. If the bond's yield to maturity is 7% when you sell it, what is the internal rate of return of your investment? New yield to maturity 7%
Price when sold
Internal rate of return
c. If the bond's yield to maturity is 5% when you sell it, what is the internal rate of return of your investment?
Price when sold
Internal rate of return
Requirements
1. To calculate the price of the bond when it was originally issued, you will use the function PV. By using the function PV calculate the price of the bond when it was originally issued.
2. Calculate the number of years left to maturity when the bond is sold.
3. To calculate the price of the bond when it was sold as in part (a), you will use the function PV. By using the function PV and absolute and relative references, calculate the price of the bond when it was sold.
4. To calculate the internal rate of return of the bond as in part (a), you will use the function RATE. By using the function RATE and absolute and relative references, calculate the internal rate of return of the bond.
5. To calculate the price of the bond when it was sold as in part (b) and part (c).
6. To calculate the internal rate of return of the bond when it was sold as in part (b) and part (c).