1.Assume that the average level of market interest rates is 5%. Use present value calculations to answer the following:

a.Would you rather have $300 today or receive $305 in one year?

b.Would you rather have $300 today or $315 in one year?

c.Would you rather receive $600 in one year or $675 in two years?

1.Consider a two-year debt instrument with a face value of $5,000 and an annual coupon payment of $125. Suppose prevailing interest rates in the economy are 1.0%.

a.Calculate the predicted price of this instrument. Does it sell for more (a premium) or less (a discount) than $5,000?

b.Calculate the nominal yield of this bond. How does it compare to the prevailing market interest rate of 1.0%? How does this comparison relate to whether the bond is sold at a premium or discount?

c.Calculate the current yield on this bond. Is the current yield higher or lower than the nominal yield?

d.Redo parts a - c if interest rates are 4.0%.