PROBLEMS (Show complete work and timelines to receive partial credit for incorrect answers) :

PROBLEMS (Show complete work and timelines to receive partial credit for incorrect answers):

1. You deposit $2,000, $3,000, and $4,000 respectively at the end of years 1, 2, and 3 from today in a mutual fund providing 10% return. Draw a timeline and compute how much your savings will be worth in 3 years. (2)

1. Aunt Zelda's son starts college in 5 years for which she will need $15,000 payable at the end of each of the 4 years. Suppose she can buy an annuity in 5 yrs. that will enable her to make the four $15,000 annual payments. Draw a timeline for all cash flows. What will be the cost of the annuity 5 years from today? What is the most she should be willing to pay for it if purchased today? Assume an interest (discount) rate of 6% during these 9 years. (5 + 3)

1. (a)         Compute the market price (Vb) of the following bonds: (6)

           i.    $1,000 par value, 10-yr maturity, and 8% coupon rate that is paid semi-annually? Assume the yield to maturity of 12%.

         ii.    $1,000 par value, 10-yr maturity, and 6% coupon rate that is paid semi-annually? Assume the yield to maturity of 12%.

       iii.    $1,000 par value, 10-yr maturity, and 8% coupon rate that is paid semi-annually? Assume the yield to maturity of 6%.

(b) Based on your answers comment on the relationship (what happens to one variable when the other goes up/down) of (a) price with yield to maturity and (b) price with coupon rate. (4)