Scenario 1

Assume that all other factors are held constant and that the interest rate is greater than zero. Increasing the number of periods (i.e., n) will cause the present value of a lump sum to be received in the future to INCREASE and the present value of an annuity to INCREASE

Do you agree with the above statements? Please express your idea with example.

Scenario 2

Congratulations! You have just won a small lottery. It will pay you either 5 annual payments of $15,000 each (with the first payment to be received two years from today), or a single lump sum to be received today. If you can invest at a 6% annual rate of interest, what is the least you should accept as the lump sum payout amount?

Scenario 3

You have financed the purchase of a used Mercedes with a $31,500 loan with a 5-year term, monthly payments, and an 8% stated annual rate. What is the amount of your monthly loan payment?

Scenario 4

You have just invested $3,000 into an account that will earn a 9% annual interest rate. You want to have exactly $8,000 in the account at the end of 5 years. The account allows you to make one deposit at the end of the 3rd year. In order to have exactly $8,000 at the end of year 5, how much must you deposit at the end of the 3rd year?

Scenario 5

Jenny just celebrated her 20th birthday and she has decided to quit drinking Diet Coke. Terry currently drinks 2 cans of Diet Coke per day at an average cost of $0.75 per can. To reward herself for quitting, Terry plans to invest all that she will save each day (i.e., $1.50) into a savings account that currently pays 6% p.a. Assuming her first deposit into the account is made tomorrow, and assuming that there are 365 days per year, how much money will be in Terrys savings account on her 65th birthday (i.e., 45 years or 16,425 days from today)?

Scenario 6

You have just discovered a $1,000 par value corporate bond with a maturity of 10 years. The bonds yield to maturity is 9% and the bond is currently selling for $743.29. What is the bonds annual coupon rate (the bond pays coupon payments annually)?

Scenario 7

What is the yield to maturity of a $1,000 par value bond with a coupon rate of 10% (semi-annual coupon payments) that matures in 30 years assuming the bond is currently selling for $838.13?

Scenario 8

A 10-year annual coupon bond was issued four years ago at par. Since then the bonds yield to maturity (YTM) has decreased from 9% to 7%. Which of the following statements is true about the current market price of the bond?

a) The bond is selling at a discount

b) The bond is selling at par

c) The bond is selling at a premium

d) The bond is selling at book value

e) Insufficient information