Homework 1

READ BEFORE YOU START: Solve each of the following question using both pricing formulas and Excel. When calculating using the pricing formula (e.g., Price of perpetuity P = C/r), please write the original formula and the steps where you plug in the number for each variable, and your final answers. When solving it using Excel, learn from the Excel functions file and show the results displayed in formula.

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1. If you wish to accumulate $150,000 in 10 years, how much must you deposit today in a bank account that pays an annual interest rate of 12%?

2. A zero-coupon bond has a face value of $21,000 and a maturity of 8 years. Similar bonds have an interest rate of 5% per year. What is the price of this bond?

3. You plan to retire in 35 years. At the end of each year, you plan on saving $15,000, and your bank pays you 2% annual interest. How much will you have saved by the time you retire?

4. A bond with a face value of $1,000 pays a 10% (APR) semiannual coupon and matures in 10 years. Similar bonds trade at a YTM of 8% (APR). What is the price of the bond?

5. You are managing a small company and need to buy some equipment for your product line. Kangaroo Manufacturing is offering free credit on a $20,000 piece of equipment. You pay down $2,000 and then $600 a month for the next 30 months. Turtle Machines does not offer free credit but will give you a $2,000 off the list price. If the rate of interest is 10% (APR) a year, which company is offering a better deal?

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