FIN 311 Sample Second Quiz

FIN 311-01 and 10

Spring 2017

D Swanton

Roosevelt University

Principles of Finance


Numerical answers

 Do all the problems. Include calculations and/or explanations in your answers wherever appropriate. More credit will be given for correct reasoning than for correct arithmetic.

1.   I buy a zero-coupon bond with a face value of $10,000 and a maturity of 20 years.

(a)       If I want to make 8% on my money, how much should I pay for the bond? $2,145.48

(b)       If I pay $6,139.13 for the bond and hold it until it matures, what rate of return will I have made? 2.42. 2.      A twenty-year, 5% coupon, $1,000 bond is for sale. It makes annual (once per year) interest payments.

2.    A 20-yr, 5%, $1,000 bond is for sale.

(a)       What cash flow can I expect if I buy the bond?

                                                             $50, $50, … , $50+$1,000

(b)       If its yield to maturity is 7%, what is its price? $788.12

(c)       If its price is $1,080.20, what is its yield to maturity? 4.39%  

(d)       If the bond in part (b) is stripped and the coupon payments sold to one investor while the face value payment is sold to another, what does each pay? $258.42 and $529.70

3.      A perpetuity has an original face value of $1,000.00 and original yield of 6%.

(a)   What is the promised, annual, coupon payment?  $60

(b)  If it is priced to yield 5%, what is that price? $1,200.00

(c)   If its price is $1,200.00, what is its yield? 5.00%


4.    You are 25 years old and expect to retire at 70 with a 20 year retirement.  You are just starting to plan for retirement and have no money in the plan yet.  You expect to earn an average of 7% in accumulation and 4% in retirement.

(a)   If you want a retirement income of $100,000 per year how much will you need the day you retire and how much must you contribute during accumulation?  $1,359,033 and $4,756 per year.

(b)   You are now 45 and have been contributing the amount you calculated in part (a).  You have $200,000 in the plan.  Can you still expect the $100,000 per year with the same contributions?  Yes

(c)   A bad week in the stock market takes away 30% of that $200,000.  If you decide to increase your contribution to make up for it, what is the new contribution?   $9,474 per year.

(d)   If you stick to your  contribution from part (a), can you retire two years later with at least $100,000 per year income?  Almost, projected income is $96,703/yr.