SECTION II You just graduated, and you plan to work for 10 years and then to lea

Question

SECTION II You just graduated, and you plan to work for 10 years and then to leave for the Australian "Outback" bush country. You figure years and $2,000 a year for the next 5 years. These savings from now. In addition, your family has just given you a $$,000 graduation gi the gift now, and your future savings when they start, into an 1) you can save $1,000 a year for the first 5 cash flows will start one year ft. If you pu account which pays s ent compounded annually, what will your financial "stake" be when you leave tor Australia 10 years from now? Ifa 5-year regular annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment? 2) The current market price of Lundqvist Corporation's 10 percent, 10-year bonds is S1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to S1,000. What is the YTM (stated on a simple, or annual, basis) if the bonds mature 10 years from today? 3)

Explanation / Answer

Solution to question 2 )

Let the annual amount be "X",

X * PVAF(10%,5) = Present value of annuity(given = 1000)

since PVAF(10%,5) = 3.791

X = 1000/3.791 = 263.78

Solution to Question 3)

The given bond is a plain vanilla bond,

YTM of plain vanilla bond is computed through this formula

[C+(FV-MP)/n ] / (FV+MP)/2

where, C =Coupon amount (here semi annual coupon amount)

FV= Face value

MP=Current market price

n =Number of periods (Here 20 because of semi annual payments)

YTM = [50+ (1297.58-1000)/20 ] / (1297.58+1000)/2

= 64.879/1148.79 = 5.65%

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