Question 1) Kay Mart has purchased an annuity to begin payment at the end of 201

Question

Question 1)

Kay Mart has purchased an annuity to begin payment at the end of 2013 (the date of the first payment). Assume it is now the beginning of 2011. The annuity is for $12,000 per year and is designed to last eight years.

If the discount rate for the calculation is 11 percent, what is the most she should have paid for the annuity?

Annuity paid $

Question 2)

Media Bias, Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 35-year life when issued and the annual interest payment was then 10 percent. This return was in line with the required returns by bondholders at that point in time as described below:

Real rate of return 2 %
Inflation premium 4
Risk premium 4

Total return 10 %


Assume that 10 years later, due to good publicity, the risk premium is now 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 25 years remaining until maturity.

Compute the new price of the bond.

New price $

Question 3

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 4 percent annual interest and has 16 years remaining to maturity. The current yield to maturity on similar bonds is 10 percent.


(a)

What is the current price of the bonds?

Current price$


(b)

By what percent will the price of the bonds increase between now and maturity?

Price increases by%

Explanation / Answer

Kay Mart has purchased an annuity to begin payment at the end of 2013 (the date of the first payment). Assume it is now the beginning of 2011. The annuity is for $12,000 per year and is designed to last eight years.

If the discount rate for the calculation is 11 percent, what is the most she should have paid for the annuity?

PVa= A X PVifa (11% , 8 periods)

=12000 x5.16 =61,752

PVa= A X PVifa (11% , 2periods)

=61,752x.812 =50,142.62 -------------maximum that should paid for annuinty

=================

Media Bias, Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 35-year life when issued and the annual interest payment was then 10 percent. This return was in line with the required returns by bondholders at that point in time as described below:

Real rate of return 2 %
Inflation premium 4
Risk premium 4

Total return 10 %


Assume that 10 years later, due to good publicity, the risk premium is now 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 25 years remaining until maturity.

FV=1000

PMT=100

N=25

I=8

PV=1213.50

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