Time Value of Money and Bond Evaluation

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Department
Finance
Course
MGFB10H3
Professor
Eileen
Semester
Fall

Description
Additionalpracticeexercisestopics2(timevalueofmoney)and3(bond valuation) Solutionsareprovidedattheend. Question1:(TVM) Youcanbuypropertytodayfor$3millionandsellitin5yearsfor$4million.Youwillearnnorental incomeontheproperty. a. Iftheinterestrateis8%,shouldyoubuytheproperty? b. Supposethepropertyearns$200,000rent,atthebeginningofeachyear.Shouldyoubuyit? c. Supposeyouthinkthatthereisonlya75%chancethepropertywillsellfor$4,000,000anda25% chancethatitwillsellfor$3,000,000in5years.Shouldyoubuytheproperty? Question2:(TVM) JenniferJackPothasjustwonlottery.Shewillget$50,000every6monthsfor10years(20payments). Thefirstpaymentwillbecoming4.5yearsfromtoday;subsequentpaymentswillbeevery6months thereafter.Ifthediscountrateis13.61%compoundedmonthly, a. Whatisthevalueofthisannuitythreeyearsfromnow? b. Whatistodaysvalueoftheannuity? Question3:(TVM) TimCronyistheKnighterrantofthePeachlandintheCourtofLuxemstein.Heis60yearsold,withan averagelifeexpectancyof87,andispaid$60,000annually.KingVincentNepotismwantshimtoresign sothatadistantcousinofKingVincentcanhavethejob.Timrefuses,sincetheappointmentisforlife. Hesuggestsinsteadthatheretiresin5yearswithapensionof$50,000perannum,withhiswife(whoi
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