Question

1. Lory won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 percent on an investment she makes, what is the minimum amount she should be willing to accept today as a lump-sum payment? (Round to the nearest hundred dollars.) A) $750,000 B) $196,780 C) $212,400 D) $235,700 2. The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that coupon payments are normally semiannual. What will be the current market price of these bonds if the market is 6.5 percent? (Round to the nearest dollar.) A) $684 B) $860 C) $527 D) $604

Answer 1

1.D.$235,700.

present value of annuity = A*[1-(1+r)^(-n)]/r

here,

A=25,000

r=10%=>0.10

n=30.

=>25,000*[1-(1.10)^(-30)]/0.10

=>25,000*9.426915

=>$235,672.88.

=>$235,700....(rounded to nearest hundred)..

2.C.$527.

zero coupon bond = par value / (1+r)^n

here,

par value =$1000

r=6.5%*6/12 =>3.25%=>0.0325 per semi annual period

n = 10 years * 2 semi annual period

=>20

=>$1000 /(1.0325)^20

=>$527.