# Sadik Inc’s Bonds Currently Sell For \$1,180 And Have A Par Value Of \$1,000

Practice Questions: Time Value of Money (TVM) & Its Applications in Investments 1. Jose now has \$500. How much would he have after 6 years if he leaves it invested at 5. 5% with annual compounding? a. \$591. 09 b. \$622. 20 c. \$654. 95 d. \$689. 42 e. \$723. 89 N6 I/YR5. 5% PV\$500 PMT\$0 FV\$689. 42 2. How much would \$5,000 due in 25 years be worth today if the discount rate were 5. 5%? a. \$1,067. 95 b. \$1,124. 16 c. \$1,183. 33 d. \$1,245. 61 e. \$1,311. 17 N25 I/YR5. 5% PMT\$0 FV\$5,000 PV\$1,311. 17 3. Suppose the U. S. Treasury offers to sell you a bond for \$747. 5. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for ,000.

What interest rate would you earn if you bought this bond at the offer price? a. 4. 37% b. 4. 86% c. 5. 40% d. 6. 00% e. 6. 60% N5 PV\$747. 25 PMT\$0 FV\$1,000. 00 I/YR6. 00% 4. You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6. 0%? Years:01234 ||||| CFs:\$0\$1,000\$2,000\$2,000\$2,000 a. ,987 b.

\$6,286 c. \$6,600 d. \$6,930 e. \$7,277

I/YR = 6. 0% 01234 CFs:\$0\$1,000\$2,000\$2,000\$2,000 PV of CFs:\$0\$943\$1,780\$1,679\$1,584 PV = \$5,987Found using the Excel NPV function. PV = \$5,987Found by summing individual PVs. PV = \$5,987Found using the calculator NPV key. 5. At a rate of 6. 5%, what is the future value of the following cash flow stream? Years:01234 ||||| CFs:\$0\$75\$225\$0\$300 a. \$526. 01 b. \$553. 69 c. \$582. 83 d. \$613. 51 e. \$645. 80 I/YR = 6. 5% 01234 CFs:\$0\$75\$225\$0\$300 FV of CFs:\$0\$91\$255\$0\$300 FV = \$645. 80Found by summing individual FVs. FV = \$645. 80Found with the NFV key in some calculators.

FV = \$645. 80Found with a calculator by first finding the PV of the stream, then finding the FV of that PV.

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PV of the stream:\$501. 99 FV of the PV:\$645. 80 6. What’s the future value of \$1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually? a. \$1,819 b. \$1,915 c. \$2,016 d. \$2,117 e. \$2,223 Years5 Periods/Yr2 Nom. I/YR6. 0% N = Periods10 PMT\$0 I = I/Period3. 0% PV = \$1,500 Could be found using a calculator, an equation, or Excel. FV = \$2,016 Note that we must first convert to periods and rate per period 7.

## Sadik Inc.’s Bonds Currently Sell For

An investor plans to buy a common stock and hold it for two years. The investor expects to receive \$1. 5 in dividend a year and \$26 from the sales of the stock at the end of year 2. If the investor wants a 15% return (compound annually), the maximum price the investor should pay for the stock today is roughly: A). \$24 B). \$28 C). \$22 D). \$32 E). \$26 C). \$22 (n=2, pmt = 1. 5, fv = 26, I = 15%, PV = ? ) 8. Morin Company’s bonds mature in 8 years, have a par value of \$1,000, and make an annual coupon interest payment of \$65. The market requires an interest rate of 8. % on these bonds. What is the bond’s price? a. \$903. 04 b. \$925. 62 c. \$948. 76 d. \$972. 48 e. \$996. 79 N8 I/YR8. 2% PMT\$65 FV\$1,000 PV\$903. 04 9. Sadik Inc. ‘s bonds currently sell for \$1,180 and have a par value of \$1,000. They pay a \$105 annual coupon and have a 15-year maturity, but they can be called in 5 years at \$1,100.

What is their yield to call (YTC)? a. 6. 63% b. 6. 98% c. 7. 35% d. 7. 74% e. 8. 12% N5 PV\$1,180 PMT\$105 FV\$1,100 I/YR = YTC7. 74% 10. Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9. %. The bond has a face value of \$1,000, and it makes semiannual interest payments. If you require an 8. 4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? a. \$1,105. 69 b. \$1,133. 34 c. \$1,161. 67 d. \$1,190. 71 e. \$1,220. 48 Par value\$1,000 Coupon rate9. 5% Periods/year2 Yrs to maturity20 Periods = Yrs to maturity ? Periods/year40 Required rate8. 4% Periodic rate = Required rate/2 = I/YR4. 20% PMT per period = Coupon rate/2 ? Par value\$47. 50 Maturity value = FV\$1,000 PV\$1,105. 69