Homework Assignment # 2 -Econ 3113 - Money, Banking, and Financial Institutions 1) A cash flow involves payments of $1000 after year 1, 2, and 3. Calculate the present value of this cash flow, assuming the following simple rates of interest: a).05 b).08 c).10 2) The State Lottery announces that the Grand Prize Winner has won $20 million, to be paid $1million per year for the next 20 years. Calculate the present value of this cash flow for the following interest rates: a).04 b) .08 3) A bond pays $1500 at maturity, which is after 5 years. Calculate the Yield to Maturity assuming the following purchase prices for the bond: a) $1000 b) $1300 c) $1600 4) Calculate the YTM on a $1000 face-value discount bond, selling for $800, maturing after a) 1 year b) 5 years c) 10 years 5) To pay for college, you have just taken out a $1000 government loan with a fixed annual payment of $300 per year for 5 years. You don't make your first payment until you graduate 2 years from now. (In other words, you make payments after years 2 through 6). How much are you implicitly "paying" on this loan (i.e. "calculate the YTM"")? 6) If there is a decline in interest rates, which would you rather be holding: long term bonds, or short-term bonds? Why? Which type of bond-has greater interest-rate risk? 7) A company offers its unionized employees either a) a one-time up-front $1500 per- employee bonus, or b) a permanent $250/year raise (paid at the end of each year) and a one-time $500 retirement bonus (paid on the employee's last day of work). Assume the average worker has 5 years left until retirement. Which option should the average worker favor if i) i= .05 ii) i= .1