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Problem Set #3

1. Payment = $500
Number of Years = 4 (48 months)
Interest = 4/12% = 0.33% per month
Future Value after 4 years = 25977.71
Ben has 2 more years of savings left. So now Present Value = 25977.71
Interest = 4% per year.
Future Value = 28097.49$
So after 6 years, Ben will have saved 28097.49 $ for payment for the house.

2)
m

APR
EAR= 1+
1
m

(a) Option 1

0.06
EAR= 1+
12

12

EAR = 6.2%
Option 2

0.058
EAR= 1+
52

52

EAR = 5.97%

(b)
Option 1 : Downpayment $ 30000
Remaining money PV= $270000
Interest = 6.2% over 30 years
Payment = 20036.80 $ per year

Option 2: Downpayment $ 30000


Remaining money PV = $ 270000
Interest = 5.97% over 30 years
Payment = 19552.28
Option 3:

0.055
EAR= 1+
12

12

EAR = 5.64%
Downpayment $ 27000
Remaining mortgage PV = 273000$
Interest 5.64% over 30 years
Payment = 19075.26
(c) Since the loan payment is lowest for Option3, Ben should select option 3.

3.
Present Value of Money Heather has saved = $550,000
Future Value of the money after 25 years at 7% interest (when Heather is 65) =
$2985087.95
Annual payment Heather makes every year = $12000
Future Value of all payments after 25 years at 5% = $572725.19
Total Money Heather has when she is 65 = $2985087.95+ $572725.19 =
$3557813.14
Money she gives to favorite charity at 65= $ 100000
So remaining money she has at 65 = $3557813.14 - $100000 = $3457813.14
Future value of her money at 90 at 5% year(with 25 year life expectancy) =
$11709382.61
After giving away $500000 for grandchildren, she would have = $11209382.61
(a) PV of $ 11209382.61 when Heather is 65 is $3310161.75, So payment she can
withdraw each year during retirement = $234864.11
(b) PV of $ 11209382.61 when Heather is 65 is $3310161.75
If withdrawals are to grow at 4% each year, using

3310161.75=

( ( ))

c1
0.05
1
0.050.04
0.06

25

So maximum amount Heather can withdraw during first year = $33452.28

4.

Yield to maturity (market rate) = 6%


Number of years = 10
(a) If we take face as 1000, coupon rate 4% means annual coupon payment is $40
So price is $852.80 for annual coupon payment (85.28% of face value)
Semi Annual Coupon Payment: If we take face value as 1000, coupon rate 4%
means semi annual coupon payment is $20
Time Periods = 20, market rate = 3% semi annual
So price is $851.23 for semi annual coupon payment (85.12% of face value)

(b) After 3 years, face value 1000, coupon rate 4% coupon payment $40, number of
years =7, yield = 6%
So price is $888.35 (88.84% of face value)
If yield is 8%, everything else is same so price is $791.745 (79.17% of face value)
If yield is 3%, everything else is same so price is $1062.3 (106.23% of face value)

5.
Amazon 3.3% coupon bond
(a) Maturity: 12/05/2021
(b) Ratings: Moodys Baa1, S&P AA- , Composite A
(c) Rank (security): Senior Unsecured
(d) Face value: 1000
(e) Callable or not. At what price and when?
Callable on and anytime after 10/05/2021 at a price 100. May be called in full or
part.

(f) Yield to maturity: 3.36%

Amazon 1.2% coupon bond


(a) Maturity: 11/29/2017
(b) Ratings: Moodys Baa1, S&P AA-, Composite A
(c) Rank (security): Senior Unsecured
(d) Face value: 1000
(e) Callable or not. At what price and when? Bullet not Callable
(f) Yield to maturity: 1.30%