7. A bond has a face value of $1000, and has 6% annual coupons. It is five years from maturity. If the market is providing a 5% return currently, what is the bond worth? (Before performing the calculation, can you guess whether the bond will sell at a discount, at par, or at a premium?)

8. Youve got a rich auntand what an exasperating person she is! Provided you show her you can do the math correctly and find its present worth, she is going to arrange a 15-payment annuity for you. It will pay you $600/year starting immediately. She wants you to assume market rates of 9%, so what is the annuity worth?

9. Heres something pretty crazy: In the late 1920s, England floated a special debt issue, comprised of bonds called consols. The government was saddled with heavy debt from the First World War, and so these bonds were designed to be attractive. The Exchequer (the British treasury) wanted investors to buy them, so the $1000 bonds paid whomever bought them 4% interest per year...forever! If interest rates are currently at 7% what would one of those consols be worth now if you could find one to buy?

10. Youre having to commute to campus from Frederictons North Side everyday, and youre tired of the long delays on the Westmoreland and Princess Margaret bridges. Youve had your eye on a used GMC 1944 DUKW 353, which will enable you to cross the river without having to bother with a bridge. Its selling for a mere $11,000, and although its engine, rudder, and bilge pumps are missing, you figure youll manage without. (Like no ones ever heard of sails, oars, and bucket, or what?) A bank officer, in a fit of whimsy, has offered you a loan for the full amount, to be paid in four years (annual payments) at 11% interest.

a) Start by telling me the size of your annual payments, b) Then set up a table (amortization schedule) with these 6 columns:

1) Year 2) Principal Balance (at beginning of year) 3) Annual Loan Payment 4) Interest Paid 5) Amortization Payment (which is applied to the outstanding principle) 6) Principal Balance (at end of year)

11. Youve purchased a $20,000 bond for $20,000, which matures in 2035. The bond comes with 10% coupons.... a. Confirm that it has a yield-to-maturity of 10%.

b. Challenge Question: Why is this bond selling for its face value?

12. A $50,000 bond, 14 years from maturity, is priced at $17,024. Its coupon rate is 0%.... a. What is the yield-to-maturity of this bond? b. Challenge Question: Given this bonds pricing, what would the current return on the market portfolio be?