Periodic Payments Annuity Perpetual Bonds & Interest Rates Exam Practice

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PBA998

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Problem 1 (5 marks) Your grandmother was so proud of her first grandchild that she started a savings plan for you when you were born. The saving plan has an interest rate of 7 percent compounded monthly and the terms of the savings plan stated that she was to make payments on your birthday each year – including the year you were born. The contract states that you cannot withdraw the money until your 25th birthday. If grandma makes the deposit on your 25th birthday and you are able to withdraw $53,319.65, how much did grandma deposit each year? Show your work! 5 marks. Problem 2 (8 marks) a. b. You have a 6% annual payment perpetual bond. If the market interest rates are 5% and the bond has a nominal $1,000 par value, what is the current market value of this bond? Show your work! 4 marks. A 15-year zero coupon bond has a face value of $1,000. If the current market interest rates are 7%, what is the price of this bond? Show your work! 4 marks. Problem 3 (6 marks) You observe that The James Company Inc. issued a $10 trillion 7 year bond 5 and a half years ago. The bond pays its 7 percent coupon semi-annually. a. If the current market interest rates are 5.5 percent, what will a bond from the James Company sell for in the market today? (4 marks) b. What is the current yield on this bond? (2 marks) Problem 4 (4 marks) You bought the James bond from problem 3 when the bond was first issued for a quoted price of 99.25. a. If you sell the bond today, what is the effective annual holding period return that you earned on your investment? Show your work and your time line. 1
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Problem 1 (5 marks)
Your grandmother was so proud of her first grandchild that she started a savings plan for you
when you were born. The saving plan has an interest rate of 7 percent compounded monthly and
the terms of the savings plan stated that she was to make payments on your birthday each year –
including the year you were born. The contract states that you cannot withdraw the money until
your 25th birthday. If grandma makes the deposit on your ...

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