Question
2.1-2.2: The U.S. government has a consol bond which pays $100 per year forever. Assume the current interest rate is 3% per year. 2.1 What
2.1-2.2: The U.S. government has a consol bond which pays $100 per year forever. Assume the current interest rate is 3% per year.
2.1 What is the value of the consol bond immediately after a payment is made?
2.2 What is the value of the consol bond immediately before a payment is made?
2.3-2.4 (Excel): You have been offered a unique investment opportunity. If you invest $1 million at t=0, you will receive $20,000 from t=1 to t=40, plus a balloon payment of $1.5 million at t=40.
2.3 What is the NPV of the investment, assume your expected rate of return in the investment is 5%?
2.4 What is the internal rate of return of the investment?
2.5-2.6 (Excel): You are considering buying a house which costs $500,000. You have only $70,000 in cash. A bank offers you a 30-year mortgage that requires annual payments and an annual interest rate of 5%. Say you will pay $70,000 as a down payment and accept the 30-year mortgage to cover the rest of the price of the house.
2.5 What will your annual payment be?
2.6 Say you can only pay $20,000 a year. You tell the bank that you will pay a balloon payment at the end of the mortgage. What will this balloon payment at least be for the bank to accept it?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started