Do the following present value problems. You must set up all present value problems before calculation. Merely writing down the answer (even if it is correct) is an automatic zero. You must show your work. a. Suppose we have a four year fixed-payment loan with $900 payments made at the end of each year. Given a market interest rate of 7 percent, how much was initially borrowed? b. Suppose you were considering purchasing a $6300 machine today that would generate additional net profit of $2500 booked at the end of each year. Assuming you need a 10 percent annual return to justify the investment, would the investment be worth doing if you had only three years of payouts? Would your answer change if you only needed a 9 percent annual return on your investment ? Why or why not? You must use present value to demonstrate your answer, and show your work. c. Consider two zero coupon bonds in which you receive $100 at the maturity date, one maturing in 3 years and one maturing in 5 years. Both are currently priced to yield 6 percent. Calculate the current market value of each bond. Now suppose the yield to maturity rises to 9 percent. Calculate the percent change in the price of each bond as the yield went from 6 to 9.
Do the following present value problems. You must set up all present value problems before calculation. Merely writing down the answer (even if it is correct) is an automatic zero. You must show your work. a. Suppose we have a four year fixed-payment loan with $900 payments made at the end of each year. Given a market interest rate of 7 percent, how much was initially borrowed? b. Suppose you were considering purchasing a $6300 machine today that would generate additional net profit of $2500 booked at the end of each year. Assuming you need a 10 percent annual return to justify the investment, would the investment be worth doing if you had only three years of payouts? Would your answer change if you only needed a 9 percent annual return on your investment ? Why or why not? You must use present value to demonstrate your answer, and show your work. c. Consider two zero coupon bonds in which you receive $100 at the maturity date, one maturing in 3 years and one maturing in 5 years. Both are currently priced to yield 6 percent. Calculate the current market value of each bond. Now suppose the yield to maturity rises to 9 percent. Calculate the percent change in the price of each bond as the yield went from 6 to 9.
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
Do the following present value problems. You must set up all present value problems before
calculation. Merely writing down the answer (even if it is correct) is an automatic zero.
You must show your work.
a. Suppose we have a four year fixed-payment loan with $900 payments made at the end of
each year. Given a market interest rate of 7 percent, how much was initially borrowed?
b. Suppose you were considering purchasing a $6300 machine today that would generate additional
net profit of $2500 booked at the end of each year. Assuming you need a 10 percent annual
return to justify the investment, would the investment be worth doing if you had only three years
of payouts? Would your answer change if you only needed a 9 percent annual return on your
calculation. Merely writing down the answer (even if it is correct) is an automatic zero.
You must show your work.
a. Suppose we have a four year fixed-payment loan with $900 payments made at the end of
each year. Given a market interest rate of 7 percent, how much was initially borrowed?
b. Suppose you were considering purchasing a $6300 machine today that would generate additional
net profit of $2500 booked at the end of each year. Assuming you need a 10 percent annual
return to justify the investment, would the investment be worth doing if you had only three years
of payouts? Would your answer change if you only needed a 9 percent annual return on your
investment ? Why or why not? You must use present value to demonstrate your answer, and
show your work.
c. Consider two zero coupon bonds in which you receive $100 at the maturity date, one
maturing in 3 years and one maturing in 5 years. Both are currently priced to yield 6
percent. Calculate the current marketvalue of each bond. Now suppose the yield to
maturity rises to 9 percent. Calculate the percent change in the price of each bond as the
yield went from 6 to 9.
show your work.
c. Consider two zero coupon bonds in which you receive $100 at the maturity date, one
maturing in 3 years and one maturing in 5 years. Both are currently priced to yield 6
percent. Calculate the current market
maturity rises to 9 percent. Calculate the percent change in the price of each bond as the
yield went from 6 to 9.
Expert Solution
Step 1
We know that present value calculated using the cash flow which is discounted with the appropriate discountin rate, herein the given question annual cash flow is given 900 which is fixed and discount rate is 7%.
We can calculate the present value = Annual cash flow x Present value factor at 7%
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