1. You buy an 8% annual coupon bond that has a 15 year maturity and a required r

Question

1. You buy an 8% annual coupon bond that has a 15 year maturity and a required return of 12%. The par value is $1,000. You sell the bond five years later when the required return is 10%. What is the ending price (sell) of the bond?
(a) $847.88
(b) $877.11
(c) $1,000
(d) $239.39
(e) $941.07
(f) $1,047.47

2. After doing some budgeting, you estimate you will need to save $25,000 for the first year of graduate school. You plan to save $450 per month in an account that earns 5% compounded monthly. How long will it take you to save the money you need?

(a) 3.56 years
(b) 50.04 years
(c) 3.96 years
(d) 46.32 years
(e) 4.17 years
(f) 3.86 years

Explanation / Answer

1. Selling price of bond = 80 * (1-1/(1+10%)^10) / 10% + 1000 / (1+10%)^10 = 877.11

Answer: Choice (B): $ 877.11

2. Let number of months required be X.

Then 25,000 = 450 * ((1+5%/12)^X - 1) / (5%/12)

Solving, we get (1+5%/12)^X - 1 = 0.231481

Or (1+5%/12)^X = 1.231481

Or X = ln(1.231481) / ln (1+5%/12) = 50.07 months = 4.17 years

Answer: Choice (E): 4.17 years

Hope this helped ! Let me know in case of any queries.

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