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fi320 - hmwk 5, 6, and 7 - 1 As we discussed in class on...

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1. As we discussed in class on the web site  http://immediateannuities.com /, the  monthly single life annuity payment for a 65 year-old man is greater than  the  single life annuity payment for a 65 year-old woman, given the same upfront in- vestment for each. Feedback: men can't expect to live as long, so the payout per month is higher in  a competitive market. 2. Which is more valuable, (1) receiving $2025 in 2 years or (2) receiving $2412 in 5  years? The interest rate is 6%. Each option has approximately the same value 3. Under normal conditions, the market price of a zero-coupon Treasury security  that pays $1000 at maturity will be Less than $1000 Feedback: With no coupons, the only way to earn a profit is to experience a rise  in price between purchase and maturity. 4. If you win $1,000,000 on the "Who Doesn't Want to be a Millionaire?" show, your  total prize of $1,000,000 is spread out over 10 equal annual payments at the end  of each year. If the interest rate in the market is 7%, the present value of the  stream of 10 annual payments is about $702,358  .
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5. For a $130,000, 30-year, 6% mortgage loan (interest compounded monthly), the  monthly payment will be $779 6. When the U.S. Treasury wants to borrow short-term, it issues Treasury Bills 7. For a Treasury bond, how are YTM and the bond price related? A) If YTM rises, the bond price falls If YTM rises, the bond price rises 8. The typical coupon bond pays interest Semi-annually 9. You have $2000 for a down payment on a car. You have negotiated a price of  $20,000 for the car, but to close the deal, the salesperson offers you the choice  of (1) a $2000 cash rebate, or (2) 0% interest financing for 30 months. Without  the special 0% financing, you would need to pay a 12% interest rate compounded  monthly, or 1% per month for the 30 months, to borrow from the bank. Assuming  the rebate would be used to increase the down payment, which alternative gives  the lower monthly payment, and by how much? Special financing is cheaper by $20 Feedback: (1) Amount borrowed = 20000-2000-2000=1600016000=PMT(PV an- nuity factor, 1%, 30 periods)Solve for PMT=620(2) PMT=18000/30=600
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10. Your Grandma Mae is 75 years old and is considering purchase of a retirement  annuity. A period certain retirement annuity promises an annual payment of  $20,000/year for 20 years. The cost of the annuity is $215,000. If the interest rate  is 6%, what is the Net Present Value? $14,398 11.
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