1. Today is Kristin’s birthday and she decides to start saving for her 3-year lo
ID: 2771931 • Letter: 1
Question
1.
Today is Kristin’s birthday and she decides to start saving for her 3-year long MBA education. She will start the MBA program on her 28th birthday. She will need $25,000 to pay for the tuition and living expenses at the end of the first year of the program. She is expecting this cost to increase by 5% each year (i.e., in year 2 it will be 5% higher than in year 1, in year 3 it will be 5% higher than in year 2), due to rising tuition and housing prices.
Kristin will make her first deposit into an account paying 10% annually in the amount of $6,553.30 one year from today, and she will continue to make an identical deposit each year up to the day she turns 28 and starts her MBA degree.
What birthday is Kristin celebrating today?
2.
Rebecca bought a corporate bond with the time to maturity of 6 years, yield to maturity of 10%, and face value of $1,000. It pays semiannual coupons and the coupon rate of 8%.
Was Rebecca’s purchased bond sold at a premium, discount, or par?
Andrew bought a different financial asset (not a bond). It pays him equal annual payments for 6 years at the end of each year. The discount rate for this asset is 15%. If he paid the same amount for this security as Rebecca paid for her bond, how much are Andrew’s annual payments?
3.
What is the Present Value of the following stream of cash flows if R=10%?
0 1 2 3 4 5 …
$1 $2 $3 $4 $5 …(and so on)
(Hint 1: It’s not equal to infinity. Hint 2: This is equivalent to a stream of $1 perpetuities, first one starting its payments in year 1, second one starting its payments in year 2, and so on forever.)
Explanation / Answer
1.
Today is Kristin’s birthday and she decides to start saving for her 3-year long MBA education. She will start the MBA program on her 28th birthday. She will need $25,000 to pay for the tuition and living expenses at the end of the first year of the program. She is expecting this cost to increase by 5% each year (i.e., in year 2 it will be 5% higher than in year 1, in year 3 it will be 5% higher than in year 2), due to rising tuition and housing prices.
Kristin will make her first deposit into an account paying 10% annually in the amount of $6,553.30 one year from today, and she will continue to make an identical deposit each year up to the day she turns 28 and starts her MBA degree.
What birthday is Kristin celebrating today?
Amount needed on her 28th birthday = 25000/1.10 + 25000*1.05/1.1^2 + 25000*1.05^2/1.1^3
Amount needed on her 28th birthday = $ 65129.60
No of Year deposit = nper(rate,pmt,pv,fv)
No of Year deposit = nper(10%,6553.30,0,-65129.60)
No of Year deposit = 7 years approx
Birthday is Kristin celebrating today = 28-7
Birthday is Kristin celebrating today = 21 Years
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