Answer the questions showing all of your work.Questions are in the attached file.
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1. Calculate the present value of a $1,000 zero-coupon bond with 10 years to maturity if the required
annual interest rate is 6.5%.
2. A lottery claims its grand prize is $25 million, payable over 25 years at $1,000,000 per year. If the
first payment is made immediately, what is this grand prize really worth? Use a discount rate of
7%.
3. Consider a bond with an 8% semiannual coupon and a face value of $1,000. Complete the
following table:
Years to Maturity
3
3
6
9
9
Discount Rate
5
8
8
5
9
Current Price
What relationship do you observe between yield to maturity and the current market value?
4. Consider a coupon bond that has a $1,000 par value and a coupon rate of 10%. The bond is
currently selling for $1,235 and has 8 years to maturity. What is the bond’s yield to maturity?
5. You are willing to pay $14,412 now to purchase a consol bond which will pay you and your heirs
$1,225 each year, starting at the end of this year. If your required rate of return does not change,
how much would you be willing to pay if this were a 20-year, annual payment, ordinary annuity
instead of a perpetuity?
6. Assume you just deposited $1,000 into a bank account. The current real interest rate is 2% and
inflation is expected to be 6% over the next year. What nominal interest rate would you require
from the bank over the next year? How much money will you have at the end of one year? If you
are saving to buy a stereo that currently sells for $1,050, will you have enough to buy it?
7. Calculate the duration of a $1,000 6% coupon bond with three years to maturity. Assume that all
market interest rates are 7%.
8. Consider the bond in the previous question. Calculate the expected price change if interest rates
drop to 6.75% using the duration approximation. Calculate the actual price change using
discounted cash flow.

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