Problem
1. You are offered two alternatives: a $2000 annuity for 7 years or a lump sum today. If current interest rates are 9 percent, how large will the lump sum have to be to make you indifferent between the alternatives?
2. You have just purchased a newly issued $1000 five-year Malley Company bond at par. The bond (bond A) pays $60 in interest semiannually ($120 per year). You are also negotiating the purchase of a $1000 six-year Malley Company bond (bond B) that returns $30 in semiannual interest payments and has 6 years remaining before it matures.
A. What is the going rate of return on bonds of risk and maturity of Malley Company's bond A?
B. What should you be willing to pay for bond B?