Author: Anonymous

Terry Austin is 30 years old and is saving for her retirement.  She is planning  on making 36 contributions to her retirement account at the beginning of  each of the next 36 years.  The first contribution will be made today  (t = 0) and the final contribution will be made 35 years from today (t = 35). The retirement account will earn a return of 5.7 percent a year.  If each  contribution she makes is $1,572.00 how much will be in the retirement account 35 years from now (t = 35)?

You are considering buying a new car.  The sticker price is $27,741.00 and  you have $2,267.00 to put toward a down payment.  If you can negotiate a  nominal annual interest rate of 8.4 percent and you wish to pay for the  car over a 6-year period, what are your monthly car payments?

You are considering buying a new car.  The sticker price is $34,942.00 and  you have $2,427.00 to put toward a down payment.  If you can negotiate a  nominal annual interest rate of 8.8 percent and you wish to pay for the  car over a 4-year period, what are your monthly car payments?

Suppose the real risk-free rate is 2.5%, the average future inflation rate is  1.7%, a maturity premium of 0.08% per year to maturity applies, i.e., MRP =  0.08%(t), where t is the years to maturity.  Suppose also that a liquidity premium  of 1% and a default risk premium of 0.4% applies to A-rated corporate bonds.   How much higher would the rate of return be on a 10-year A-rated corporate  bond than on a 5-year Treasury bond.  Here we assume that the pure  expectations theory is NOT valid.   

Currently, 3-year Treasury securities yield 6.7%, 7-year Treasury securities yield  6.9%, and 10-year Treasury securities yield 7.2%. If the expectations theory is  correct, what does the market expect will be the yield on 3-year Treasury securities seven years from today?

You observe the following yield curve for Treasury securities: Maturity             Yield 1 Year                1.50% 2 Years              2.60% 3 Years              3.50% 4 Years              4.00% 5 Years              4.80% Assume that the pure expectations hypothesis holds.  What does the market expect will be  the yield on 3-year securities, 2 year from today?

Keys Corporation’s 5-year bonds yield 8.6%, and 5-year T-bonds yield 6.9%. The real risk-free rate is r* =  2.5%, the inflation premium  for 5 years bonds is  IP = 4%, the default risk premium for Keys’ bonds is DRP = 0.3% versus  zero for T-bonds, and the maturity risk premium for all bonds is found with  the formula  MRP =  (t – 1)*0.1%, where t = number of years to maturity.  What  is the liquidity premium (LP) on Keys’ bonds?

You observe the following yield curve for Treasury securities: Maturity             Yield 1 Year                2.60% 2 Years              4.00% 3 Years              4.60% 4 Years              5.00% 5 Years              5.80% Assume that the pure expectations hypothesis holds.  What does the market expect will be  the yield on 3-year securities, 2 year from today?

A baseball player is offered a 5-year contract that pays him the following amounts: Year 1:  $2.3 million Year 2:  $2.2 million Year 3:  $1.7 million Year 4:  $2.6 million Year 5:  $1.6 million Under the terms of the agreement all payments are made at the end of each year. Instead of accepting the contract, the baseball player asks his agent to negotiate  a contract that has a present value of $3 million more than that which has been  offered.  Moreover, the player wants to receive his payments in the form of a 5-year  annuity due.  All cash flows are discounted at 12.1 percent.  If the team were   to agree to the player’s terms, what would be the player’s annual salary (in millions  of dollars)?

Jill currently has $431,861.00 in a brokerage account.  The account pays a  10.8 percent annual interest rate.  Assuming that Jill makes no additional  contributions to the account, how many years will it take for her to have $1,186,122.00 in the account?