Answer the following questions assuming the interest rate is 12 percent.

a. What is the present value of $1,000 in six years?

b. What is the present value of $1,000 in 12 years? Why does the present value fall as the number of years increases?

c. How much would you pay for the right to receive $5,000 at the end of year 1, $3,000 at the end of year 2, and $10,000 at the end of year 10?

d. How much would you pay for a 14-year bond with a par value of $1,000 and an 8 percent coupon rate? Assume interest is paid annually.

e. How much would you pay for a share of preferred stock paying a $9-per-share annual dividend forever?

f. What will be the value in eight years of $500 invested today? (Hint: Present value = PVF times the future value, where PVF is the present value factor from the appendix for the appropriate interest rate and time period. Thus, future value = [1/PVF] times present value.) g. About how long will it take for a $1,000 investment to double in value? h. What will be the value in 20 years of $600 invested at the end of each year for the next 20 years? i. A couple wishes to save $200,000 over the next 18 years for their child's college education. What uniform annual amount must they deposit at the end of each year to accomplish their objective? j. What return do you earn if you pay $3,837 for a stream of $1,000 payments lasting eight years? What does it mean if you paid less than $3,837 for the stream? More than $3,837? k. How long must a stream of $500 payments last to justify a purchase price of $4,166.67? Suppose the stream lasted only seven years. How large would the salvage value (liquidating payment) have to be to justify the investment of $4,166.67? L. An investment of $1,000 today returns $66,666 in 30 years. What is the internal rate of return on this investment?

AppendixLO1