Question

2. You purchase the following discount bonds with varying maturities. Initial Price Cash Next Year Return Bond А B E F G H J Maturity 2 years 3 years 5 years 2 years 3 years 5 years 2 years 3 years 5 years Face Value 5,000 5,000 5,000 10.000 10.000 10.000 20.000 20.000 20,000 (a) Assume an initial interest rate of 5%. Calculate the present value of each bond. (This is the initial market price for each instrument, this is your initial cost.) (6) One year later, you decide to liquidate your portfolio (all the bonds will be converted into cash.) The market interest rate is now 1%. How much cash will you receive from each of these instruments at this time? (c) Calculate your one-year rate of return for each instrument. (just a simple percent calculation) (d) Carefully examine your results and then provide a narrative explaining the larger lessons you can extract from this exercise. Explain your answer in some detail. 3. A relative has opened an account in your name in the amount of $4,000. The account pays 6% annual interest compounded quarterly (four times per year). You do not make any withdrawals nor any additional contributions for five years. What is the account balance after five years? 4. Determine the expected return on a proposed initiative that you estimate: • has a 10% probability of generating a 12% return • has a 20% probability of generating a 9% return • has a 30% probability of generating a 6% return, and has a 40% probability of generating a 3% return 5. Calculate the real interest rate for a scenario where the nominal interest rate is 6% and the expected inflation rate is 1.5%. Provide two results, one using the precise version of the Fisher equation and a second result using the approximate version of the Fisher equation.

Answer 1

classmate Date Page (3) Account Balance After 5 year Opened Account 84000. Rate 6% -21.5% Pes destes Time t = 5 year - 20 Time Vekee after 5 yess - Youo x (1.015) 20 4ovo x 1,3468 = $5889 Arowes$ 5387 a 47 has 50% Probabilities of Generationg 0% Retum Because 'Joncrease 1 %. it Decrease 0.30% Return Probability 5 Precise Version of fisher : It i 1 + P 1+0.06 4.437 -1 1 +0.015 Approximation i-p 0.06 -0.015 4.50 7. CS Scanned with CamScanner