IE 342 STUDY SET 3 FALL 2017 Do not submit your solutions as they will not be graded! 1) Zeynep is offered a bond at a price of $1,430. coupon rate of the bond is 12%, maturity is 15 years and par value is $1,000. Coupon payments will be made semiannually. If Zeynep buys this bond and holds it to maturity, what return on investment (yield to maturity) will she earn? 2) One of the leading consumer goods companies considers investing in the project whose cash flows are indicated in the table below. Project costs $130,000 Year Cash Flows 20,000 $25,000 30,000 35,000 $40,000 4 a) b) Find the payback period of the project. If interest rate is 15%, what is the discounted payback period? 3) Due to the consistent increase in demand, the CEO of Company ABC decided to increase manufacturing capacity of the company by adding a new machine to the plant located in Jakarta. Price of the machine is $180,000. This machine also requires additional site preparation for $15,000. The company expects to use the new machine for 5 years and increase annual revenues by $75,000. At the end of 5 years, it is estimated that the salvage value of the machine will be $60,000. Should the CEO of the company ABC be persistent in purchasing this new machine? If not, what other alternatives can she take into consideration? 4) Suppose that you would like to buy a house which costs $500,000. To finance the house, You consider paying with a fully amortized mortgage under 8% APR compounded monthly for 25 years. Note that the interest rate is fixed for the entire life of the a) mortgage. What is the monthly payment amount? Again, you consider paying with a fully amortized mortgage in 25 years. However, the interest rate is not fixed for entire life of the mortgage (adjusted rate mortgage). Instead, APR compounded monthly, for first 10 years is 6%, for years between 11 and 15 is 7% and finally for years between 16 and 25 is 8%, what is the b) monthly payment for each year? c) Based on part (b), calculate the interest payment and principal payment for the first month of 11th year, and 16th year