Question 1

John and Marsha are in an argument about an investment which requires a series of six annual deposits.

If an investor decides to invest, he/she has to deposit $30,000 at the end of year 1, $30,000 at the end of year 2, $30,000 at the end of year 4, $30,000 at the end of year 5, $30,000 at the end of year 6 and $30,000 at the end of year 7. The deposited amounts grow at a rate of 5% p.a.

The argument is about the nature of the cash flow stream of the six deposits whether the cash flows are an annuity or a mixed stream. As per Johns opinion, the value of this investment at the end of year 7 will be $244,260.25 while Marsha thinks that the value of this investment at the end of year 7 will be $207,795.07

You are required to assist both in coming to a resolution of the argument by doing as follows:

i) As per your own understanding of the cash flow pattern of deposits presented above, compute the value of the investment at the end of year 7. Clearly highlight all computational steps.

ii) Clearly indicate who, amongst John and Marsha, is conceptually correct in terms of the type of cash flow stream and why? If you feel that the cash flow stream is an annuity, state your reasons. If you think it is a mixed stream, state your reasons within 50-100 words.

Question 2

Is it true that on the date of maturity, a bond does not carry any interest rate risk? Briefly explain in no more than 150 words. Do not quote anybody. Use your own words.