Question

2. An accounting firm will need $17,000 in 5 years to replace its computer system. What periodic deposits to a sinking fund paying quarterly interest at a 9% annual rate will achieve that goal? Mary have saving plan with replacement rate equal to 75% of her preretirement income $60,000.00. She expect to live 15 years after retiring at age 65 and her age now is 40 years. If the real interest rate is 3% then a. What will be her total target replacement income? b. How much does she need to save annually to reach her goal? 4. Using Discounted Dividend Model, compute the price of a stock if • You hold the stock for one year • Expected dividend per share (D1)= $15 Expected ex-dividend price at the end of the year (P1) = $100.00 • Risk adjusted discount rate or market capitalization (expected rate of return in order to invest) (k)= 12% 5. What is the current yield of a coupon bond of 12% if the face value is $2000 and its price is $21002 6. What is the yield to maturity on a one-year, 51000 Treasury bill with a current price of S8502 7. What is the difference between interest rates and rate of returns?

Answer 1

2.

I = 9% / 4 = 2.25% per quarter

t = 5 * 4 = 20 quarters

Quarterly payment = 17000 *(A/F, 2.25%,20)

= 17000 * 0.0225 / ((1 + 0.0225)^20-1)

= 17000 * 0.0225 / ((1.0225)^20-1)

= 17000 * 0.040142

= 682.42

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