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Practicequestionsposted - of face value does it sell for...

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1. What is the value of a T- period annuity (payment of 1) if the interest rate is zero? Why can’t you use the formula? Do you need to know whether a period is a year or a month? 2. Convert an 8% APR with daily compounding to an APR with compounding every second. 3. How can we understand a regular T-period annuity in terms of perpetuities? 4. You will obtain $10000 in 10 year. Inflation is at 5%. The real interest rate is 6%. a) What is the purchasing power of $10,000 in terms of today’s price level? b) What is the present value of $10,000? 5. Compute the year-1 and year 2- spot rates given the bond prices of two government bonds. Both bonds offer a coupon rate of 5%. A bond with one year maturity trades at 100, the two year bond trades at 98.2115. 6. The US Treasury has a 30 year bond outstanding with a coupon of 5%. This bond was originally issued 5 years ago. What price (expressed at a percent
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Unformatted text preview: of face value) does it sell for today if its yield to maturity is 7%? [10] ( Assume, that interest rate payments are made annually and that the yield to maturity is quoted as an APR with annual compounding ) 7. Would you expect the yield to maturity on a 10 year government bond to be higher or lower than on a three month t-bill (under normal circumstances)? Explain! Note, that both face no risk of default. 8. Peter is happy about a job offer. He has the option to obtain the salary at the beginning or at the end of the respective month of work. How much higher/ lower must be the monthly payout of the late option relative to the early option to make him indifferent between accepting either contract? Assume a flat interest rate across all maturities!...
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