1. A fixed payment loan with annual payments of $1,000 for the next 10 years. The interest rate is 2%.
(Show your work: PV for each payment, and also show the overall PV.)
2. A lottery offers a grand prize of $1 million, payable over 10 years at $100,000 per year, starting immediately. What is this grand prize really worth? Use an interest rate of 3%.
(Show your work: PV for each payment, as well as the total.)
3. Consider a bond with a 2% annual coupon and a face value of $1,000.
Find the current price for each of the following combinations
a. 2 years to maturity, 1% yield to maturity
b. 2 years to maturity, 2% yield to maturity
c. 2 years to maturity, 3% yield to maturity
d. 4 years to maturity, 2% yield to maturity
(Again, show your work! — PV for each cash flow, as well as the total.)
4. You bought a 3% coupon bond with a face value of $1,000 one year ago for $1,200, and you just sold it for $1,260. What was your return (or rate of return) on the bond?