C298 Practice Problem Set #4
Note: some of these questions involve solving for yield to maturity (YTM). On an exam,
you will not be asked to solve for YTM using trial and error. However, you will develop
good intuition about bond prices and yields by solv

Solutions to C298 Practice Problem Set #3
1. (a) FV (1.06)12 2.012
(b) FV (1.12)6 1.9738
(c) FV (1.36)2 1.8496
1 (1.001)n
2. 500 1
.001
n
0.50 1 (1.001)
0.50 (1.001)n
ln(0.50) n ln(1.001)
ln(0.50)
n
ln(1.001)
n 693.49 weeks or 13.34 years
3. The Present

C298 Practice Problem Set #3
1. The rule of 72 states that money doubles whenever interest rates and time multiplied
together equal 72. How close is this for the following rates and times: (a) 6%, 12 years;
(b) 12%, 6 years; (c) 36%, 2 years?
2. After get

C298 Practice Problem Set #5
1. ABC International has issued $1,000 face value bonds that pay coupons
semiannually. The coupon rate is 8% and the bonds have 20 years until maturity.
(a) If you require a YTM of 9% for a bond of this risk, how much would yo

Solutions to C298 Practice Problem Set #4
1 (1.12)2
2
1. (a) P 100
1,000(1.12) $966.20
.12
20
1 (1.12)
20
(b) P 100
1,000(1.12) $850.61
.12
(c) P
100
$833.33
.12
2. (a) The equation to be solved for the effective periodic yield, rannual , is:
1 (1

Solutions to C298 Practice Problem Set #1
1.
FV
(a)
=
=
=
8,000+ 8000(.09)(4)
$10,880
=
=
=
8,000 (1.09)4
$11,292.65
(b)
FV
(c)
FV
=
=
=
2.
8,000
$11,420.97
In 100 years with an interest rate of 10%
FV
=
= $13,780.61
=
= $34,064.18
and with an interest ra

Commerce 298
Lecture 11B:
Risk & Return
Objectives
By the end of this class, you should be able to:
Define risk and establish a risk measure.
Calculate the variance and standard
deviation of returns for a portfolio.
Determine the benefits of and limits

Commerce 298
Lecture 11A:
Intro to Risk & Return
Objectives
By the end of this class, you should be able to
Describe the historical evidence on return on
various investments.
Calculate expected values, variances, and
standard deviations.
Calculate and

C298 Practice Problem Set #2
1. (a) If $2,000 is placed in a savings account at the end of each year for 5 years, what is the
value of this account at the end of the fifth year, given that money paid into the account
earns 10 percent simple interest?
(b)

C298 Practice Problem Set #1
1. (a) An $8,000 loan calls for simple interest payments of 9 percent per year. Repayment
of principal and all accumulated interest is to be made at the end of year 4. What amount
needs to be repaid?
(b) Assume the same loan a

Commerce 298
Lecture 1B:
Valuation of Cash Flows
Objectives
By the end of this class, you should be able to:
Distinguish between simple and compound interest.
Explain why when you receive a cash flow partly
determines how much that cash flow is worth.

Commerce 298
Lecture 2B:
Annuities
Objectives
By the end of this class, you should be able to:
• Describe the characteristics of an annuity.
• Perform PV and FV calculations for standard
annuities.
• Determine whether to use PV or FV in
annuity calculatio

Commerce 298
Lecture 3A:
Annuities and Perpetuities
Objectives
By the end of this class, you should be able to:
•
•
•
Adjust PV and FV calculations to deal with
“moving annuities” or “annuities due”.
Convert interest rates, regardless of how they
are quot

Commerce 298
Lecture 4B:
Bonds
Objectives
By the end of this class, you should be able to:
• Find the market price of a bond given its yield
to maturity (YTM).
• Set up the equation to solve for a bond’s
effective periodic yield and, by extension, its
YTM

Commerce 298
Lecture 3B:
Loans and Bonds
Objectives
By the end of this class, you should be able to:
• Identify and value perpetuities.
• Perform calculations for pure discount loans,
interest only loans, and amortized loans.
• Calculate the amount owing

Commerce 298
Lecture 5B:
Bonds
Objectives
By the end of this class, you should be able to:
• Distinguish between nominal and real
interest rates and know which rate to use.
• Solve savings and investment problems
involving inflation.
• Explain the Law of

Commerce 298
Lecture 2A:
Interest Rates and Compounding
Objectives
By the end of this class, you should be able to:
Define and calculate effective periodic rates
of interest.
Distinguish between APR rates and effective
periodic rates.
Determine the eff

Commerce 298
Lecture 5A:
Bonds
Objectives
By the end of this class, you should be able to:
• Calculate the realized rate of return after
holding a bond and reinvesting the coupons.
• Explain why the realized rate of return on a
bond may differ from the bo

Solutions to C298 Practice Problem Set #5
1.
a) The YTM of 9% is an APR rate, with compounding occurring semi-annually.
.09
Thus, rsa =
= .045 .
2
1 (1.045)40
40
P0 = $40
+ $1,000(1.045) = $907.99
.045
b) If you require a YTM of 9% and if the YTM on t