Finance Week 2 Homework - Problem set 2

Chapter 4 : Time Value of Money

1)
a. You are 20 now and die at 70.
70 – 20 = 50
260*6.20 = Cost of cigarettes per year = 1612
1612(1/0.02)(1-1/1.02^50) = 50,654
b. 1612/0.02 = 80,600
c. 1612/0.02 = 80,600
d. IN CLASS
e. 30 – 20 = 10 years
1612(1/0.08)(1-1/1.08^10) = 10816.65

Chapter 5 : Interest Rates

2)
a. 1.02*1.01 = 1.0302
(1+R)^2=1.0302
R = 1.499%
b.
Year Interest Yield Calculation
1 2% 2% 0.02
2 1% 1.499% 1.02*1.01 = 0.302
3 0% 0.997% 1.02*1.01*1 = 0.302
4 0% 0.75% 1.02*1.01*1 = 0.302
5 0% 0.6% 1.02*1.01*1 = 0.302

c. 0.997
d. IN CLASS

Chapter 6 : Bonds
3)
a. Coupon rate is 6% / 2 = 3% so 10 payments of 3%*1000 = $30 each, occurring at the end of
every 6 months. One repayment of $1000 (face value) after 5 years = 10 periods of 6 months
b. show that today’s price of bond is 1.138.33
p = 30/0.015 +1000/1.015^10 = 1138.33
c. Equation to find YTM
In CLASS