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Exam 4: Present Value

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Question 1

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Consider a five-year fixed-payment security that has a present value of $1,500.If the annual rate of discount is 2 percent, the payment made at the end of each year is

A) $231.77.
B) $288.24.
C) $300.00.
D) $310.00.

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Question 2

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​Consider a fixed­payment security that pays $100 at the end of every year for five years.If the annual rate of discount is 7 percent, the present value of the security is

A) ​$142.64.
B) ​$410.02.
C) ​$789.34.
D) ​$999.63.

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Question 3

Multiple Choice

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​If the interest accumulated on a principal amount of $5,000 at the end of a year is $400, the annual rate of interest must be

The present value of a security is

The amount of money invested in a financial security or deposited into a financial intermediary is referred to as the

Consider a fixed-payment security that pays $100 at the end of every year for three years.If the annual rate of discount is 10 percent, the present value of the security is

The present value of a series of future payments is

Past return refers to the

The difference between the present value of a perpetuity that pays $250 every year and a perpetuity that pays $500 every year when the annual rate of discount is 5% is

The amount repaid by a coupon bond at maturity is called its_____ value.

Consider a perpetuity that pays $300 every year.If the rate of discount is 6 percent, calculate the present value of the bond.

A bond that makes a regular interest payment until maturity, at which time the face value is repaid is referred to as a

Earning interest on the interest that was earned in prior years is referred to as

The amount of money that you would need to invest today to yield a given future amount is called the

In the one-period present-value equation, P = F/(1 + i) , the term i is known as

Consider a perpetuity that pays $100 every year.If the annual rate of discount is 7 percent, the present value of the perpetuity is

On February 1, 2013, Janet buys a bond for $10,000 that makes coupon payments of $600 after each of the following two years and returns its principal of $10,000 at the end of the second year.In other words, it is a standard coupon bond with a 6 percent annual interest rate making payments once each year. On February 1, 2014, Janet receives her first coupon payment of $600.At that time, the market interest rate on bonds like hers has fallen to 4 percent.She sells her bond to Justin at that time, for a price equal to the present value of the bond's payments. a.How much does Justin pay Janet for the bond? Both Janet and Justin have tax rates of 30 percent on interest income and 20 percent on capital gains.(Note that if someone has a capital loss, you may assume that he or she can reduce taxes by the amount of the capital loss times the tax rate of 20 percent.) b.CalculateCalculate Janet's after-tax rate of return for the past year (from Feb. 1, 2013, to Feb. 1,2014). Janet's after-tax rate of return for the past year (from Feb.1, 2013, to Feb.1, 2014). c.What is Justin's after-tax rate of return for the year from Feb.1, 2014, to Feb.1, 2015? Explain and show all your work for each part.You may assume, of course, that the market works and does not malfunction.

Consider a one-year discount bond that pays $1,500 one year from now.If the annual rate of discount is 4 percent, the present value of the bond is

Suppose you take out a home equity loan of $100,000 for 5 years at an annual interest rate of 5 percent, with payments to be made monthly.What will the approximate monthly payments be? The relevant formula is: $F = P \times \frac { i } { 1 - \left( \frac { 1 } { 1 + i } \right) ^ { N } }$ .

Consider a one-year discount bond that pays $2,000 one year from now.If the annual rate of discount is 3 percent, calculate the present value of the bond.