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Question 1 Maryann is planning a wedding anniversary gift of a trip to Hawaii for her husband at the end of 5 years
Question 1
Maryann is planning a wedding anniversary gift of a trip to Hawaii for her husband at the end of 5 years. She will have enough to pay for the trip if she invests $5,000 per year until that anniversary and plans to make her first $5,000 investment on their first anniversary. Assume her investment earns a 4 percent interest rate, how much will she have saved for their trip if the interest is compounded in each of the following ways?
a. Annually
b. Quarterly
c. Monthly
Question 2
The face value for WICB Limited bonds is $250,000 and has a 6 percent annual coupon. The 6 percent annual coupon bonds matures in 2035, and it is now 2020. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 10 percent. How much should Karen sell her bonds today?
Expert Solution
1-a). We can calculate the future value by using the following formula in excel:-
=fv(rate,nper,-pmt,pv)
Here,
FV = Future value
Rate = 8%
Nper = 10 periods
Pmt = $5,000
PV = $0
Substituting the values in formula:
= fv(8%,10,-5000,0)
= $72,432.81
1-b). We can calculate the future value by using the following formula in excel:-
=fv(rate,nper,-pmt,pv)
Here,
FV = Future value
Rate = 8%/4 = 2% (quarterly)
Nper = 10*4 = 40 periods (quarterly)
Pmt = $5,000
PV = $0
Substituting the values in formula:
= fv(2%,40,-5000,0)
= $302,009.92
1-c). We can calculate the future value by using the following formula in excel:-
=fv(rate,nper,-pmt,pv)
Here,
FV = Future value
Rate = 8%/12 = 0.6667% (monthly)
Nper = 10*12 = 120 periods (monthly)
Pmt = $5,000
PV = $0
Substituting the values in formula:
= fv(0.6667%,120,-5000,0)
= $914,730.18
2). We can calculate the present value by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Present value
Rate = 10%
Nper = 15 periods (2020 - 2035)
Pmt = Coupon payments = $250,000*6% = $15,000
FV = $250,000
Substituting the values in formula:
= -pv(10%,15,15000,250000)
= $173,939.20
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