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Question

Using the formulas for finite geometric series:


(b) Suppose UTM issues bonds with a one-year

maturity and $1000 face value on January 1,

2019. These bonds pay quarterly coupons of $50 on April 1, 2019; July 1, 2019; October

1, 2019; and January 1, 2020. Compute the present value of this annuity in two ways:

First by using simple compounding interest to bring back each individual payment, then

confirm your answer by using the annuity formula you found in part (a). Assume an

APR of 1.3%.

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