NAME: _           ___       Lucas, Reshettia____________  


1. Your grandfather spent $4,000 to buy 300 shares of stock in a new company 25 years ago. The stock has appreciated 3 percent per year on average. What is the current value of these 300 shares?






2. You have just received a prize worth $5,000. You deposited your winnings into an account which pays 7 percent interest compounded annually. How much will you receive from your winnings if you wait 15 years before you withdraw?






3. You want to have $200,000 for your daughter’s education 16 years from now. If you can earn 5 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal?






4. You are planning a large wedding 3 years from today when your fiancé finishes medical school. You have estimated that you will need $65,000 for this affair. You can earn 7 percent compounded annually on your savings. How much would you have to deposit today in one lump sum to pay for the entire wedding?






5. Fred has $1,500 today and wants $2,010 to buy some sound equipment. How long will Fred have to wait to buy the equipment if he earns 5 percent compounded annually on his money?







6. How much money does Albert need to deposit into his investment account today if he wishes to withdraw $70,000 a year for 5 years? He expects to earn an average rate of return of 9 percent.







7. You can afford car payments of $3,000 a year for 5 years. The bank will lend you this money today at 4 percent interest. How much can you borrow?






8. The Bigelow Co. is considering the purchase of some new equipment. The quote consists of an annual payment of $2,500 for 6 years at 2 percent interest. What is the purchase price of the equipment?






9. You are considering an investment for your retirement which would entail $1,000 payments each year for 30 years. The investment will pay 6 percent interest. How much will this investment be worth at the end of the 30 years?







10. You save $8,000 every year for 40 years with your retirement plan. If the interest rate is 7%, how much money can you receive from this plan when you retire?






11. You would like to establish a trust fund that would pay annual payments to your heirs of $200,000 a year forever. You expect the trust fund to earn an average return of 7 percent. How much do you need to deposit into this trust fund today to achieve your goal?






12. The Idealistic Insurance Company offers a perpetuity which pays annual payments of $40,000. This contract sells for $550,000 today. What is the interest rate?







13. UWA Inc. issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 5 years, pays annual coupons, and the market rate is 6%, what will be the bond sell for?







14. The bonds of TigerPaw, Inc. carry a 9% annual coupon, have a $1,000 face value, and mature in 15 years. Market rate is 5%. What is the market value of Tiger’s bonds?







15.   Why can you compute the future value of an annuity but not the future value of a perpetuity?






16.   Assume that you manage a bond portfolio. Looking ahead to the next twelve to eighteen months, you expect interest rates to rise fairly significantly. What actions might you take to position your portfolio for this anticipated change in rates?






17.   Identify at least four factors that affect a bond’s yield. Briefly explain the effect that each factor has on the yield.



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