Homework # 1- AK
Due: Wednesday, September 30
Problem # 1
Suppose a U.S. government bond will pay $1,000 three years from now.
If the going interest rate on 3-
year government bonds is 4%, how much is the bond worth today?
Problem # 2
Addico Corp's 2005 earnings per share were $2, and its growth rate during the prior 5 years was 11.0%
If that growth rate were maintained, how long would it take for Addico’s EPS to double?
Problem # 3
You want to buy a condo 5 years from now, and you plan to save $3,000 per year, beginning
You will make 5 deposits in an account that pays 6% interest.
Under these assumptions,
how much will you have 5 years from today?
Problem # 4
What annual payment would you have to receive in order to earn an 8% rate of return on a perpetuity
that cost $1,500?
Problem # 5
What’s the present value of $2,000 discounted back 3 years if the appropriate interest rate is 8%,
Problem # 6
Bank A offers to lend you $10,000 at a nominal rate of 7%, compounded monthly.
The loan (principal
plus interest) must be repaid at the end of the year. Bank B also offers to lend you the $10,000, but it
will charge 8%, with interest due at the end of the year.
What is the difference in the effective annual
rates charged by the two banks?
Problem # 7
After graduation, you plan to work for Mega Corporation for 10 years and then start your own business.
You expect to save $5,000 a year for the first 5 years and $10,000 annually for the following 5 years,
with the first deposit being made a year from today.
In addition, your grandfather just gave you a
$20,000 graduation gift which you will deposit immediately.
If the account earns 8% compounded
annually, what how much will you have when you start your business 10 years from now?
Problem # 8