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1) You have just won the Strayer Lottery jackpot of $11,000,000
1) You have just won the Strayer Lottery jackpot of $11,000,000. You will be paid in 26 equal annual installments beginning immediately. If you had the money now, you could invest it in an account with a quoted annual interest rate of 9% with monthly compounding of interest. What is the present value of the payments you will receive?
2) You are considering a 10-year, $1,000 par value bond. Its coupon rate is 9%, and interest is paid semiannually. The data has been collected in the Microsoft Excel Online file below.
If you require an "effective" annual interest rate (not a nominal rate) of 11.93%, how much should you be willing to pay for the bond? Do not round intermediate steps. Round your answer to the nearest cent.
Expert Solution
1) We can calculate the present value of payments by using the following formula in excel:-
=-pv(rate,nper,pmt,fv,type)
Here,
PV = Present value of payments
Rate = 9.38%
Nper = 26 periods
Pmt = $11,000,000 / 26 = $423,076.92
FV = $0
Type = 1
Substituting the values in formula:
= -pv(9.38%,26,423076.92,0,1)
= $4,453,793.24 Or $4,453,793
Working note:
EAR = (1+rate/n)^n-1
= (1+9%/12)^12-1
= 9.38%
2) Price of the bond = $848.75 Or $849
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