Sub Annual Time Value of Money
1.A zero-coupon bond is a security that pays no interest,
and is therefore bought at a substantial discount from its face value. If
stated interest rates are 5% annually (with continuous compounding) how much
would you pay today for a zero coupon bond with a face value of $1,200 that
matures in 9 years?
Please round your answer to the nearest cent.
2. A financial institution offers a “double-your-money”
savings account in which you will have $2 in 7 years for every dollar you
invest today. What stated annual interest rate (assuming monthly compounding)
does this account offer?
Please specify your answer in decimal terms and round your
answer to the nearest thousandth (e.g., enter 12.3 percent as 0.123).
3. You have $50,000 in savings for retirement in an
investment earning a stated annual rate of 8% compounded semi-annually. You
aspire to have $1,000,000 in savings when you retire. Assuming you add no more
to your savings, how many years will it take to reach your goal?
Please round your answer to the nearest hundredth.
Note that the HP 12c financial calculator rounds up the
periods result to the next integer and will not give the correct answer to the
nearest hundredth. Therefore, you should use Excel or a financial calculator
that does provide decimal precision to the number of periods.
4. You deposit $1,200 in a bank account that pays 9% stated
annual interest compounded semi-annually. What is the value of your investment
at the end of 4 years?
Please round your answer to the nearest cent.
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