comm 298 chapter 5 selected solutions

# 5 lo2 its a reflection of the time value of money the

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5. (LO2) It’s a reflection of the time value of money. The Province of Ontario gets to use the \$76.04 immediately. As payment for deferring his own use of that money, the investor receives one interest payment of \$23.96 plus return of the principal amount of \$76.04 on the maturity date. 6. (LO2) The key considerations would be: (1) Is the rate of return implicit in the offer attractive relative to other, similar risk investments? and (2) How risky is the investment; i.e., how certain are we that we will actually get the \$10,000? Thus, our answer does depend on who is making the promise to repay. 7. (LO2) The Province of Alberta security would have a somewhat higher price because Alberta is a stronger borrower than Ontario, as reflected in a AAA credit rating for Alberta and a lower AA credit rating for Ontario. 8. (LO2) The price would be higher because, as time passes, the price of the security will tend to rise toward \$100. This rise is just a reflection of the time value of money. As time passes, the time until receipt of the \$100 grows shorter, and the present value rises. In 2010, the price will probably be higher for the same reason. We cannot be sure, however, because interest rates could be much higher, or Ontario’s financial position could deteriorate. Either event would tend to depress the security’s price. Calculator Solutions 1. (LO1) Enter 10 6% \$5,000 N I/Y PV PMT FV Solve for \$8,954.24 \$8,954.24 – 8,000 = \$954.24

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2. (LO1) Enter 16 10% \$2,250 N I/Y PV PMT FV Solve for \$10,338.69 Enter 13 8% \$8,752 N I/Y PV PMT FV
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