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Kevin Wallace Grade = 45/50 Ch.7 Homework P.229 # 28-33 28. Future Value=\$1,500,000 Years to Maturity=40 Nominal Rate=11% Inflation=3.8% (1+R)=(1+r) (1+h) (1+0.11)=(1+r) (1+0.038) (1.11) / (1.038) = (1+r) (1.0694)=(1+r) (1.0694-1)=r 0.0694=r We first need to find the real interest rate on the savings. Using the Fisher equation, the real interest rate is: (1 + R ) = (1 + r )(1 + h ) 1 + .11 = (1 + r )(1 + .038) r = .0694 or 6.94% Now we can use the future value of an annuity equation to find the annual deposit. Doing so, we find: FVA = C {[(1 + r ) t – 1] / r } \$1,500,000 = \$ C [(1.0694 40 – 1) / .0694] C = \$7,637.76 29. P0= C{1-[1(1+r)^t]}/r+\$1,000([1/(1+r)^t]) P0= 120{1-[1/(1.09)^5]}/0.09+\$1,000([1/(1.09)^5]) P0= 120 {1-[1/1.5386])/0.09+\$1,000([1.5386]) P0=120{1-0.6499}/0.09+\$1,000(0.64994) P0=120{0.3500}/0.09+\$1,000(0.64994) P0=42/0.09+\$649.94 P0=\$466.67\$649.94

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P0=\$1116.61 Price bond after one year P1= C{1-[1(1+r)^t]}/r+\$1,000([1/(1+r)^t]) P1= 120{1-[1/(1.09)^4]}/0.09+\$1,000([1/(1.09)^4]) P1= 120{1-0.70842}/0.09+\$1,000(0.70842) P1= 120 {0.29157}/0.09+\$1,000(0.07842) P1=34.98/0.09+\$708.42 P1=388.76+\$708.42 P1=\$1097.18 Current Yield=Annual Coupon/Price Current Yield=120/1116.61
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