A corporation has promised to pay $1,000 20 years from today for each bond sold

Question

A corporation has promised to pay $1,000 20 years from today for each bond sold now. No interest will be paid on the bonds during the 20 years, and the bonds are discounted at an interest rate of 7%, compounded semiannually. Approximately how much should an investor pay for each bond?

A. $70.00

B. $252.57

C. $629.56

D. $857.43

Your retirement account has a current balance of $50,000. What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually?

A. 5.02%

B. 7.24%

C. 9.80%

D. 10.07%

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due?

A. $10

B. $61.40

C. $10 × Number of years in annuity stream

D. $6.14 × Number of years in annuity stream

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%?

A. 60%

B. 80%

C. 20%

D. 40%

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share, has an expected dividend of $2.50, and a required return of 20%?

A. $0

B. $6

C. $8

D. $10

Explanation / Answer

1.

Compute the current price of the bond using excel function:

Rate = 0.07/2 = 0.035

Pmt = 0

Nper = 20 *2 = 40 periods

Future value (FV) = $1000.

PV = PV(Rate, Nper, Pmt, FV) = =PV(0.07/2,40,0,-1000) = $252.57.

Therefore, the correct answer is option B.

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