Reference no: EM132685968

Problem 1: Assume that a bond makes 30 equal annual payments of $1,000 starting one year from today. (This security is sometimes referred to as an amortizing bond.) If the discount rate is 3.5% per annum, what is the current price of the bond? (Hint: Recognize that this cash flow stream is an annuity and that the price of an asset is the present value of its future cash flows.)

Option 1: 356.27

Option 2: 2,856.79

Option 3: 18,329.05

Option 4: 2806.79

Problem 2: Assume that a bond makes 10 equal annual payments of $1,000 starting one year from today. The bond will make an additional payment of $100,000 at the end of the last year, year 10. (This security is sometimes referred to as a coupon bond.)

If the discount rate is 3.5% per annum, what is the current price of the bond?

(Hint: Recognize that this bond can be viewed as two cash flow streams: (1) a 10-year annuity with annual payments of $1,000, and (2) a single cash flow of $100,000 arriving 10 years from today. Apply the tools you've learned to value both cash flow streams separately and then add.)

Option 1: 79,208.485

Option 2: 89,283.93

Option 3: 70,891.88

Option 4: 8,316.605