1. You won a S40,000,000 lotto! The payment by the state will be made in 20 installments of S2,000,000 equal payments at the beginning of the next 20 years. You think you can earn 8% on reinvested funds. Your DePaul Business School friend, Becky Blue Demon, works for a company that pays lump-sum amounts in return for the lotto cash flows. a. What is the annuity due present value of the cash flow stream? b. If your friend's firm offers $16 million, what is their implied return on the cash flows? c. As a rational Scarlet Hawk should you accept her offer? d. If the firm can borrow at 10% to fund the $16 million, should they rationally make the offer? 2. At the end of this year you plan to invest S in a retirement plan expected to earn 8% compounded annually The payment is the first of 40 annual payments you are going to make. You are going to increase the size of these payments 3% each year. In 40 years you want to have enough wealth to invest in a safe annuity expected to earn 4%, compounded annually, that makes a growing payment at the end of each of the first 20 years of retirement. You want the first retirement payment to be $50,000 at the end of first year ofretirement, with a subsequent payments increasing by an expected 2% inflation rate The problem spans 60 years (40 years of saving and 20 years of retirement) a. How much will wealth is required (at the end of year 40, just as you start your retirement to finance the growing annuity? b. What is the value of at the end of this year-your first payment-needed to meet your needs that you calculated in part a? 3. ou observe the following US Treasury strip prices on zero-coupon bonds maturing 1, 2, 3 and 4 years from now. The price assumes principal payment of S100 at maturity Maturity Strip Price $98 $94 $90 $86 a. Calculate the APR of each of these bonds, with annual compounding. b. What is the fair price of a 4-year coupon paying bond that makes payments of S50 at the end of the next three years and $1050 at the end of the 4th year? 1. You won a S40,000,000 lotto! The payment by the state will be made in 20 installments of S2,000,000 equal payments at the beginning of the next 20 years. You think you can earn 8% on reinvested funds. Your DePaul Business School friend, Becky Blue Demon, works for a company that pays lump-sum amounts in return for the lotto cash flows. a. What is the annuity due present value of the cash flow stream? b. If your friend's firm offers $16 million, what is their implied return on the cash flows? c. As a rational Scarlet Hawk should you accept her offer? d. If the firm can borrow at 10% to fund the $16 million, should they rationally make the offer? 2. At the end of this year you plan to invest S in a retirement plan expected to earn 8% compounded annually The payment is the first of 40 annual payments you are going to make. You are going to increase the size of these payments 3% each year. In 40 years you want to have enough wealth to invest in a safe annuity expected to earn 4%, compounded annually, that makes a growing payment at the end of each of the first 20 years of retirement. You want the first retirement payment to be $50,000 at the end of first year ofretirement, with a subsequent payments increasing by an expected 2% inflation rate The problem spans 60 years (40 years of saving and 20 years of retirement) a. How much will wealth is required (at the end of year 40, just as you start your retirement to finance the growing annuity? b. What is the value of at the end of this year-your first payment-needed to meet your needs that you calculated in part a? 3. ou observe the following US Treasury strip prices on zero-coupon bonds maturing 1, 2, 3 and 4 years from now. The price assumes principal payment of S100 at maturity Maturity Strip Price $98 $94 $90 $86 a. Calculate the APR of each of these bonds, with annual compounding. b. What is the fair price of a 4-year coupon paying bond that makes payments of S50 at the end of the next three years and $1050 at the end of the 4th year
