Unformatted text preview: ay? LG2 4–13 Present value An Iowa state savings bond can be converted to $100 at maturity
6 years from purchase. If the state bonds are to be competitive with U.S. Savings
Bonds, which pay 8% annual interest (compounded annually), at what price
must the state sell its bonds? Assume no cash payments on savings bonds prior
to redemption. LG2 4–14 Present value and discount rates You just won a lottery that promises to pay
you $1,000,000 exactly 10 years from today. Because the $1,000,000 payment
is guaranteed by the state in which you live, opportunities exist to sell the claim
today for an immediate single cash payment.
a. What is the least you will sell your claim for if you can earn the following
rates of return on similar-risk investments during the 10-year period?
(3) 12% CHAPTER 4 Time Value of Money 175 b. Rework part a under the assumption that the $1,000,000 payment will be
received in 15 rather than 10 years.
c. On the basis of your findings in parts a and b, discuss the effect o...
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