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HallHomework3 - FI360 Week 3 Homework Randall Hall Problem...

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FI360: Week 3 Homework Randall Hall Problem 4-1 A best-selling author decides to cash in on her latest novel by selling the rights to the book’s royalties for the next four years to an investor. Royalty payments arrive once per year, starting one year from now. In the first year, the author expects $400,000 in royalties, followed by $300,000, then $100,000, then $10,000 in the three subsequent years. If the investor purchasing the rights to royalties requires a return of 7 percent per year, what should the investor pay? (400,000 / 1.07^1) + (300,000 / 1.07^2) + (100,000 / 1.07^3) + (10,000 / 1.07^4) = 725,122.134 Problem 4-12 Bennifer Jewelers recently issued ten-years bonds that make annual interest payments of $50. Suppose you purchased one of these bonds at par value when it was issued. Right away, market interest rates jumped, and the YTM on your bond rose to 6 percent. What happened to the price of your bond? (50 / 1.06^1) + (50 / 1.06^2) + (50 / 1.06^3) + (50 / 1.06^4) + (50 / 1.06^5) + (50 / 1.06^6) + (50 / 1.06^7) + (50 / 1.06^8) + (50 / 1.06^9) + (50 / 1.06^10) + (1000 / 1.06^10) = 926.399129 1000 - 926.399129 = 73.600871 The price of the bonds dropped $73.600871
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FI360: Week 3 Homework Randall Hall Problem 5-1
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