1. You have a loan outstanding. It requires making 3 annual payments at the end of the next 3 years of $1,000 each. Your bank has offered to allow you to skip making the next 2 payments in lieu of making one large payment at the end of the loan's term in 3 years. If the interest rate on the loan is 5.00% , what final payment will the bank require you to make so that it is indifferent between the two forms of payment?
The present value of the cash flows is ---------------- (Round to the nearest dollar.)
2. The British government has a consol bond outstanding paying £400 per year forever. Assume the current interest rate is 4% per year.
a. What is the value of the bond immediately after a payment is made?
b. What is the value of the bond immediately before a payment is made?
3. You are head of the Schwartz Family Endowment for the Arts. You have decided to fund an arts school in the San Francisco Bay area in perpetuity. Every 5 years, you will give the school $500,000. The first payment will occur 5 years from today. If the interest rate is 11.2% per year, what is the present value of your gift?-
4. You are 24 years old and decide to start saving for your retirement. You plan to save $5,000 at the end of each year (so the first deposit will be one year from now), and will make the last deposit when you retire at age 65. Suppose you earn 6% per year on your retirement savings.
a. How much will you have saved for retirement?
b. How much will you have saved if you wait until age 32 to start saving (again, with your first deposit at the end of the year)?
5. You are thinking of building a new machine that will save you $1,000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 2%.