FIN 311-01 and 10
Principles of Finance
SAMPLE SECOND QUIZ
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.