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Unformatted text preview: Spring 2008 Engineering 120 Industrial Engineering & Operations Research March 18, 2008 Page 1 of 2 Midterm  Solutions 1. The effective monthly rate is 1%. EAR = (1 . 01) 12 1 = 0 . 126825. Since this rate is greater than the YTM, you will prefer to sell the bond. 1 The bond is at par which implies that the price of the bond is $10,000. Thus, you will be receiving $10 , 000 at the end of each year. The total number of bonds is 2038 2009 + 1 = 30. The present value at the beginning of 2009 is: PV bonds = 10 , 000 1 1 . 126825 30 . 126825 = $76655 . 48 . The PV of the first years salaries is: PV 1 = 8000 1 1 . 01 12 . 01 Similarly, the PV of the second years salaries at the beginning of the second year is: PV 2 = 8000 1 . 06 1 1 . 01 12 . 01 Similarly, PV 3 = 8000 1 . 06 2 1 1 . 01 12 . 01 PV 4 = 8000 1 . 06 3 1 1 . 01 12 . 01 and so on.. Therefore, these PVs form a growing annuity (due) where the growth rate is 0.06 and C = 8000 1 1 . 01 12 . 01 : PV salary...
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This note was uploaded on 08/30/2008 for the course ENGIN 120 taught by Professor Ilan during the Summer '08 term at University of California, Berkeley.
 Summer '08
 ILAN
 Operations Research

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