Situation 1 You are considering buying a bond with a face value of $1,150, with interest paid semi-annually at an annual interest rate of 4%. You want an annual retum of 10% compounded semi-annually Assume the bond will mature at par in 10 years. Choose the correct answer that gives you the maximum amount you would be willing to pay today to acquire this bond. a) P=46S(P/A,5%,10) + 1 150S(P/F,5%, 10) b) P= $1,150(P/A,10% 10) +$1,150(P/F,10%,10) c) P= $23(P/A,5%,20) +$1,150(P/F,5%,20) d) P= $23(P/A,2%,20) +$1,150(P/F,2%,20) situation 2 You are paying today S524 for a 6-year bond with coupons payable semi-annually and a coupon rate of 11%. This bond is redeemable at its face value, i.e. 5600. If you hold this bond until maturity, what is the average effective rate of return you would earn? Situation 3 An investment of $56,000 must earn an interest rate of 8% per year, capitalized (compounded) semi-annually. This investment is for a term of 7 years. Calculate the time required to double the value of this investment. Situation 4 The city of Montreal has just installed new software for an indefinite period of time. From the amounts indicated in the table below, calculate the present value at year of all costs at a rate of 11% per year. Total cost of the new system (year 0) 200 0008 7 5005 Maintenance costs for the first four years (end of year) Maintenance cost for subsequent years over an infinite period of time (year end) 9 2005 Situation 5 The following is a table of annual cash flows. Interest is 11% per year capitalized (compounded) semi-annually. Calculate the capitalized (future) value at the beginning of year 17. 1 2 4 5 7 8 9 10" 12 31081 s3108310942084208 42054205420505 S205 1005 situation 6 Here is a cash flow diagram that represents two different interest rates covering a 12-year period. Interest is capitalized (compounded) annually. 470$ 470$ 370$ 300$ 270$ 8--6% 170$ 175$ 175$ 175$ 150$ 0 1 2 3 4 5 6 7 8 9 10 11 12 i=8% i=12% a) Calculate the present value at year 0, using as few factors as possible. b) Considering only one interest rate (i=12%) for all years, calculate the equivalent annuity