Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question

Transcribed Image Text:Today is January 1, 2022. Roy will use a single premium to
purchase an annuity today. This annuity pays $10,000 at
the end of each year while Roy is alive. The estimated
probability of Roy surviving for the next 4 years is stated
in following table. The yield rate is assumed to be j₁ =
4.5% p.a. Calculate the premium value. Round your
answer to three decimal places.
Year
1
2
3
4
Probability of surviving from start of year
to end of year
a. $17490.442
b. $19100.000
c.
$14729.264
d. $17651.074
0.83
0.62
0.46
0
Today is 1 July, 2022, Georg plans to purchase a
corporate bond with a coupon rate of j2 = 3.15% p.a. and
a face value of $100. This corporate bond matures at par.
Its maturity date is 1 January, 2025. The yield rate is
assumed to be j₂ = 4.7% p.a. Assume that this corporate
bond has a 9% chance of default in any six-month period
during its term. Assume, also, that, if default occurs,
Georg will receive no further payments at all. Calculate
Georg's purchase price. Round your answer to three
decimal places.
a. $55.789
b. $95.722
O c. $97.355
d. $61.172
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