CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196222
Author: Bodie
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 12, Problem 24PS
You have
a. A
b. A two-year CD at a bank offering an interest rate of
c. A
What role does you
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You have $5000 to invest for the next year and are considering three alternatives:
a money market fund with an average maturity of 30 days offering a current yield of 6% per year.
a 1-year savings deposit at a bank offering an interest rate of 7.5%
a 20-year U.S. Treasury bond offering a yield to maturity of 9% per year
What role does your forecast of future interest rates play in your decisions?
The amount of money originally put into an investment is known as the present value P of the investment. For example, if you buy a $50 U.S. Savings Bond that matures in 10 years, the present value of the investment is the amount of money you have to pay for the bond today. The value of the investment at some future time is known as the future value F. Thus, if you buy the savings bond mentioned above, its future value is $50. If the investment pays an interest rate of r (as a decimal) compounded yearly, and if we know the future value F for t years in the future, then the present value P = P(F, r, t), the amount we have to pay today, can be calculated using the formula below.
P = F ×
1
(1 + r)t
We measure F and P in dollars. The term
1/(1 + r)t
is known as the present value factor, or the discount rate, so the formula above can also be written as the following.
P = F × discount rate
(a) Explain what information the function P(F, r, t) gives you.
The function…
You have some money to invest and you are considering purchasing unsecured notes which are a bond-type instrument that have been issued by JoJo Inc. The notes has $1,000 par value, mature in five years and have coupon rate of 10.75%, with coupon paid annually. What price(value) would you be prepared to pay for the notes if your alternative is to invest in your friends company who will guarantee you a 10% pa return?
Chapter 12 Solutions
CONNECT WITH LEARNSMART FOR BODIE: ESSE
Ch. 12 - Prob. 1PSCh. 12 - Why does it make intuitive sense that the slope of...Ch. 12 - Which one of the following firms would be...Ch. 12 - Prob. 4PSCh. 12 - How do each of the following affect the...Ch. 12 - The present value of a firm’s projected cash flows...Ch. 12 - Prob. 7PSCh. 12 - Which of the following is consistent with a...Ch. 12 - Which of the following is not a governmental...Ch. 12 - Prob. 10PS
Ch. 12 - Prob. 11PSCh. 12 - ATech has fixed costs of 7 million and profits of...Ch. 12 - Choose an industry and identify the factors that...Ch. 12 - What monetary and fiscal policies might be...Ch. 12 - If you believe the U.S. dollar is about to...Ch. 12 - Unlike other investors, you believe the Fed is...Ch. 12 - Consider two firms producing smartphones. One uses...Ch. 12 - Prob. 18PSCh. 12 - Prob. 19PSCh. 12 - Prob. 20PSCh. 12 - In which stage of the industry life cycle would...Ch. 12 - Prob. 22PSCh. 12 - Why do you think the change in the index of labor...Ch. 12 - You have 5,000 to invest for the next year and are...Ch. 12 - General Weedkillers dominates the chemical weed...Ch. 12 - Prob. 26PSCh. 12 - Prob. 27PSCh. 12 - Prob. 28PSCh. 12 - Prob. 29PSCh. 12 - Prob. 30PSCh. 12 - Prob. 31PSCh. 12 - Prob. 32PSCh. 12 - Prob. 33CCh. 12 - Prob. 1CPCh. 12 - Prob. 2CPCh. 12 - Prob. 3CPCh. 12 - Prob. 4CPCh. 12 - Prob. 5CPCh. 12 - Prob. 1WM
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You are considering investing in a savings bond that will pay $50,000 in 6 years. If the competitive market rate is fixed at 6% per year, what is the bond worth today?arrow_forwardSuppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 2% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 10%. a. What will be your cash flow at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be your real return? c. What will be your nominal return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)arrow_forwardSuppose your friend is debating purchasing a bond that has a $1,000 par value, 13 years to maturity, and a 7% annual coupon. Your friend would like to determine the yield to maturity if the bond sells for a price of $980. In order to use your financial calculator to solve for the rate of return on this bond, you need to know the following information: PV: the bond's value or price N: the number of years before the bond matures PMT: the dollars of interest paid each year, which equals the coupon rate times the par value of the bond FV: par, or maturity, value of the bond Complete the following table by selecting the appropriate values for N, PV and PMT. Then use your financial calculator to solve for the rate of return, and complete the final row of the table. Input $1,000 Keystroke I/Y PV PMT FV Output Suppose your friend wants to know what price the bond will be in three years assuming the yield to maturity remains constant. To calculate what the bond price will be three years from…arrow_forward
- You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $2.3 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds. Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position?. Five-year Twenty-year Market Value Five-year Twenty-year million million b. What must be the face value of each of the two zeros to fund the plan? Face Value million millionarrow_forwardYou manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $2.3 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds. Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.) Five-year Twenty-year Market Value million million b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Five-year Twenty-year Face Value million millionarrow_forwardYou manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $2.1 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds.Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.) Market Value Five year: Twenty year: b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Face Value Five year: Twenty year:arrow_forward
- You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $1.8 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds.Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.) Market Value Five-Year ___ Million Twenty-Five Year ___ Million b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Face Value Five-Year ___ Million Twenty-Five Year ___ Millionarrow_forwardCan I get assistance on this question please?arrow_forwardYou manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $1.4 million per year. The interest rate is 8%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds.Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position?arrow_forward
- you are considering investing in a four year security which pays 6,000 in one year. 6,000 in two years, 6,000 in 3 years and 17,500 in 4 years. the security currently trades at a price of of 18,483.77. What is the yield to maturity of the security? What is duration?arrow_forwardWe would like you to take a role of a fixed income specialist and provide advice to a friend who has an investment problem. Suppose your friend has some savings and they are thinking about investing them in bonds for a period of two years. They are considering the following two bonds that are currently available on the market: four-year bond with face value $10,000, coupon rate 6%, paying coupons annually eight-year bond with face value $10,000, coupon rate 10%, paying coupons annually Assume that the term structure of interest rates is the following: r1=1%, r2=3%, r3=5%, r4=7%, r5=8%, r6=8.5%, r7=9%, r8=9.2%. Assume also that in two years there are two different possible states of the world with equal probability: all interest rates stay at the same level or all interest rates increase by 1% Your friend wants you to tell them the rate of return they could earn on each of the above two bonds over the period of two years. They also ask for advice about which bond to select for…arrow_forwardSuppose the risk-free interest rate is 4.6%. Having $600 today is equivalent to having what amount in one year? (Round to the nearestcent.) Having $600 in one year is equivalent to having what amount today? (Round to the nearestcent.) Which would you prefer, $600 today or $600 in one year? Does your answer depend on when you need the money? Why or why not? (Round to the nearestcent.)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Chapter 8 Risk and Return; Author: Michael Nugent;https://www.youtube.com/watch?v=7n0ciQ54VAI;License: Standard Youtube License