1. Suppose a State of Missouri bond will pay $10,000 when it matures 5 years fro
ID: 2659973 • Letter: 1
Question
1. Suppose a State of Missouri bond will pay $10,000 when it matures 5 years from now. This is a zero-coupon bond, which means that there are no interest payments between now and when the bond matures. That is, there is only a single cash flow 6 years from now. If the going interest rate on these bonds is 3.5% (compounded annually), how much is the bond worth today?
2. Berkley Trucking recently purchased a new truck costing $147,800. The firm financed this purchase at 7.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt?
Explanation / Answer
1) The bond is worth of 10000/1.035^6 = 8135.00
2)
Assuming 7.6% interest rate compounded monthly we have monthly interest rate = .076/12 = 0.63% Monthly payment = $2,100 2100*PVIFA(.63%,n)= 147800 PVIFA(.63%,n) = 70.38095 Trying n = 30 we have PVIFA(.63%,93) = 70.4 n = 93 months equal to 7 years and 9 months.Related Questions
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