2) Using the amounts in the table below and an interest rate of 8% compounded an

Question

2) Using the amounts in the table below and an interest rate of 8% compounded annually, determine

(a) the equivalent present amount

(b) the equivalent annual amount (c)

the equivalent future amount at EOY 11 Use the gradient conversion factor, if and where applicable, for full credit.

EOY              Deposit

0                       100

1                        0

2                       200

4                        500

5                        500

6                        500

7                        500

8                         650

9                         550

10                       450

11                        350

3) I have an opportunity to buy a $5000 bond that pays 10% per year and matures in 8 years. What will be my rate of return if I buy the bond today for $6000?

Explanation / Answer

(a) Equivalent Present amount: $ 2,967. 88 ( Note 1)

(b) Equivalent Annual amount:                     (Note 2)

(c) Equivalent Future Amount: : $ 7,454.97

Note 1:

0

                                                       Total:                           $ 2,967.88

Note 2:

11                   350                        552.22                     7454.97

3) Calculation of Rate of Return on Bonds:

Interest Rate = 10%, period = 8 years, Face Value = 50,000 and Current Price = 60,00

Then, Current Yeild: 5000/60000 = 8.33%

Return on Maturity: 6.691%

EOY Deposit Interest @ 8% Present Value 0 100 100 1 0 0.926

0

2 200 0.857 171.47 3 500 0.794 396.92 4 500 0.735 367.51 5 500 0.681 340.29 6 500 0.630 315.08 7 500 0.583 291.75 8 650 0.540 351.17 9 550 0.500 275.14 10 450 0.463 208.44 11 350 0.429 150.11

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