1. Present Values.

Compute the present value of a $100 cash flow for the following
combinations of discount rates and times:
1. r = 8 percent. t = 10 years.
2. r = 8 percent. t = 20 years.
3. r = 4 percent. t = 10 years.
4. r = 4 percent. t = 20 years.

2. Future Values. Compute the future value of a $100 cash flow for the same
combinations of rates and times as in problem 1.

6. Interest Rate. Find the interest rate implied by the following combinations of present
and future values:
Present Value Years Future Value
$400 11 $684
$183 4 $249
$300 7 $300

22. Loan Payments. If you take out an $8,000 car loan that calls for 48 monthly payments
at an APR of 10 percent, what is your monthly payment? What is the effective annual
interest rate on the loan?

Must use the excel ‘PMT’ function for # 36, 37

37. Amortizing Loan. You take out a 30-year $100,000 mortgage loan with an APR of 6
percent and monthly payments. In 12 years you decide to sell your house and pay off the
mortgage. What is the principal balance on the loan?

38. Amortizing Loan. Consider a 4-year amortizing loan. You borrow $1,000 initially,
and repay it in four equal annual year-end payments.
a. If the interest rate is 8 percent, show that the annual payment is $301.92.
b. Fill in the following table, which shows how much of each payment is interest versus
principal repayment (that is, amortization), and the outstanding balance on the loan at
each date.
Time Loan Balance Year-End Interest Due on Balance Year-End Payment Amortization
of Loan
0 $1,000 $80 $301.92 $221.92
1 ————— ————— 301.92 —————
2 ————— ————— 301.92 —————
3 ————— ————— 301.92 —————
4 0 0 —— ——
c. Show that the loan balance after 1 year is equal to the year-end payment of $301.92
times the 3-year annuity factor.
3. Bond Yields. A bond with face value $1,000 has a current yield of 7 percent and a
coupon rate of 8 percent. What is the bonds price?

4. Bond Pricing. If Circular File(6 year bond pays interest of $80 annualy and sells for
$950) wants to issue a new bond at a face value, what coupon rate must the bond offer?

18. Bond Prices and Yields.

a. Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yield to
maturity of 7 percent. Now, with 8 years left until the maturity of the bonds, the company
has run into hard times and the yield to maturity on the bonds has increased to 15 percent.
What has happened to the price of the bond?
b. Suppose that investors believe that Castles can make good on the promised coupon
payments, but that the company will go bankrupt when the bond matures and the
principal comes due. The expectation is that investors will receive only 80 percent of face
value at maturity. If they buy the bond today, what yield to maturity do they expect to
receive?

1)

a. r = 8 percent. t = 10 years.

1
1−
(1 + r )t
PVannuity = C ×
r

1
1−
= (1.08)10
$100 × ( ) = $100 × 6.71008
0.08

= $671.008

b. r = 8 percent. t = 20 years.

= $100 × 9.8181

= $981.81

c. r = 4 percent. t = 10 years.

= $100 × 8.1109
= $811.09

d. r = 4 percent. t = 20 years.

= $100 ×13.5903
= $135.903

1) PV = $100 × 6.7101 = $671.01

2) PV = $100 × 9.8181 = $981.81

3) PV = $100 × 8.1109 = $811.09

4) PV = $100 × 13.5903 = $1,359.03

2)

FV = $100 × 14.487 = $1,448.7

FV = $100 × 45.762 = $4,576.2

FV = $100 × 12.006 = $1,200.6

FV = $100 × 29.778 = $2,977.8

6)

PV = FV × PV Factor

PV Factor = PV ÷ FV

1) PV Factor = $400 ÷ $684 = 0.584795

If we scan the Present Value Table for an amount with number of periods = 11,
we will see that 0.584795 corresponds to an interest rate of 5%

2) PV Factor = $183 ÷ $249 = 0.73494, period is 4, interest rate = 8%

3) PV Factor = $300 ÷ $300 = 1, period is 7, interest rate = 1%

22)

Please see the attached excel sheet for calculations

Monthly payment = $202.90

Effective Interest Rate = Total Interest Payments ÷ Principle

= $1,739.23 ÷ $8,000

= 21.74%

EAR (Effective Annual Interest Rate) = 10.47%

37)

$79,079.44. Please see the attached excel sheet

38)

a. If the interest rate is 8 percent, show that the annual payment is

$301.92.

1
1−
PV = Payment × (1 + r )t
r

1
1−
$1,000 = Payment × (1.08) 4
0.08

$1,000 = Payment × 3.31213

Payment = $1,000 ÷ 3.31213

= $301.921

b. Fill in the following table, which shows how much of each payment is
interest versus principal repayment (that is, amortization), and the
outstanding balance on the loan at each date.
 Year-End Amortization of
Time Loan Balance Year-End Interest Due on Balance Payment Loan
0 $1,000 $80 $301.92 $221.92
1 $778.08 $62.25 $301.92 $239.67
2 $538.41 $43.07 $301.92 $258.85
3 $279.56 $22.36 $301.92 $279.56
4 $0.00 $0.00 $301.92 $301.92

Calculations are on the attached excel sheet

3)

Coupon Rate = $1,000 × 8% = $80

Coupon Payment
Current Yield =
Bond's Price

$80
Bond's Price =
0.07

= $1,142.86

4)

If a bond is selling at par, then its coupon rate must equal its yield to maturity.
Therefore, if Circular File wants to issue a new 6-year bond at face value, it should
issue it at 9.12%. Please see the attached excel sheet

18)

a)

The bond price will decrease. This is because there is an inverse relationship
between bonds’ prices and interest rates, when interest rates increase, prices
decrease, and the opposite is true.
Since the coupon payment is $70. The price of the bond, right now, can be computed
as (35/.075)[1-(1.075)-16] + 1000/1.07516 = 634.34.

b)

If investors expect to receive all coupon payments plus 80% of the face value,
then we have the equation 634.34 = (35/k)[1-(1+k)-16] + 800/(1+k)16. Clearly, the
answer here must be less than 15%, since 15% is the promised yield, i.e. the
maximum possible yield. Let's try 14% per annum, i.e. 7% per six-months. If we
do that, then the price works out to 709.54. Hence the answer must be even
lower. If we try 13%, the price works out to 633.95, which is pretty close. The
right answer must be just higher than 13%.