Problem 1. Amortizing Bond

Assume that a bond makes 30 equal annual payments of\$1,000

$1,000starting one year from today.

(This security is sometimes referred to as an amortizing bond.)

If the discount rate is3.5\%

3.5%per annum, what is the current price of the bond?

(Hint: Recognize that this cash flow stream is an annuity and that the price of an asset is the present value of its future cash flows.)

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

Problem 2. Coupon Bond

Assume that a bond makes 10 equal annual payments of\$1,000

$1,000starting one year from today.

The bond will make an additional payment of\$100,000

$100,000at the end of the last year, year 10.

(This security is sometimes referred to as a coupon bond.)

If the discount rate is3.5$%

per annum, what is the current price of the bond?

(Hint: Recognize that this bond can be viewed as two cash flow streams: (1) a 10-year annuity with annual payments of\$1,000

$1,000, and (2) a single cash flow of\$100,000

$100,000arriving 10 years from today. Apply the tools you've learned to value both cash flow streams separately and then add.)

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

Problem 3. Paying for School

Your daughter will start college one year from today, at which time the first tuition payment of\$58,000

$58,000must be made. Assuming that tuition does not increase over time and that your daughter remains in school for four years, how much money do you need today in your savings account, earning5\%

5%per annum, in order to make the tuition payments over the next four years ?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

Problem 4. Perpetuities

Imagine that the government decided to fund its current deficit of\$431

$431billion dollars by issuing a perpetuity offering a4\%

4%annual return. How much would the government have to pay bondholders each year in perpetuity? Express your answer in billions of dollars.

(Hint: The\$431

$431billion is just the present value of these cash flows at a discount rate of4\%

4%.)

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.