A.

Suppose that Firm Y has bonds outstanding that mature in 12 years and offer a 6.5 percent annual coupon rate, paid semiannually. Market required returns on similar bonds are 6.25 percent annual. For parts a. through c., use an algebraic solution to the problem, not a financial calculator and calculate and show the value of the present value factor for both the interest payment component and the return of principal component of the bonds value.

a. What is the interest payment component of this bonds intrinsic value?

b. What is the return of principal component of this bonds intrinsic value?

c. What is the total intrinsic value of the bond?

d. Use your financial calculator to confirm your result in part c. Show the keystrokes and values input to the calculator.

B.

Ms. B is 55 years old and is planning to retire at age 62. She wants to have a retirement income from that point until age 85. She projects that she will need $5,000 per year during her retirement to supplement her other retirement income. In addition, she wants to leave an inheritance of $25,000 each to her four grandchildren. She has accumulated a nest egg $25,000 at this point. Assume that she can invest at a 9% annual rate in the pre-retirement period, that her funds can be invested at a 10% annual rate after retirement, and that contributions and withdrawals occur at the end of each year. use a financial calculator to solve, show all keystrokes and values input (e.g. FV = $XXX, PMT = $YYY, etc.)

a. Sketch the time line of the cash flows for this problem.

b. Does she have enough accumulated at this point to fund her plan?

c. If she does not have enough, how much must she save each year for the next 7 years in order to fund her plan?