Unless otherwise noted, use tables for compound interest rate calculations. If y

Question

Unless otherwise noted, use tables for compound interest rate calculations. If you want to receive any partial credit, show cash flow diagrams and well organized work. Cash Flow Diagrams MUST be shown to receive credit for the problem. 1) What is the maximum you would bid for a bond with a face value of $10,000 and an annual interest rate of 8% payable semi-annually? Assume your MARR is 5% per semi-annual cycle and that the bond matures in 7 years. Your company can purchase a piece of equipment or lease it. Using their MARR of 10% compounded annually, determine the equivalent annual costs. (STATE THE ANNUAL COST FOR EACH OPTION AND THEN CIRCLE THE BEST OPTION) 2) Purchase: Equipment $25,000; maintenance costs S1,400 yearly salvage value after 7 years $3,000 Lease: $4,000 first of year payments; 7 year life (payments are at the beginning of the year)

Explanation / Answer

1)

1 Par value (FV) $                                       10,000 2 Coupon rate 8.00% 3 Number of compounding periods per year 2 4 = 1*2/3 Interest per period (PMT) $                                       400.00 5 Number of years to maturity 7 6 = 3*5 Number of compounding periods till maturity (NPER) 14 7 Market rate of return/Required rate of return 5.00% 8 = 7/3 Market rate of return/Required rate of return per period (RATE) 2.50% Bond bid price PV(RATE,NPER,PMT,FV)*-1 Bond bid price $                                 11,753.64

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