Answered: What is the present value of a security…

What is the present value of a security that promises to pay you $5,000 in 20 years? Assume that you earn 7% compounded semi-annually if you were to invest in other securities of equal risk.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 14P

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

What is the present value of a security that promises to pay you $5,000 in 20 years? Assume that you earn 7% compounded semi-annually if you were to invest in other securities of equal risk.

A Mortgage company offers to lend you US$150,000; the loan calls for payments of $12,088 per year for 30 Years. What interest rate is the mortgage company charging you?

Bank A offers to pay you a lump sum of $20,000 after 5 years if you deposit $9,500 with them today. Bank B, on the other hand, says that they will pay you a lump sum of $22,000 after 5 years if you deposit $10,700 with them today. Which offer should you accept, and why?

Justincase Corporation has issued a bond that has a 10% coupon rate, payable semi-annually. The bonds mature in 7 years, have a face value of $1,000 and a yield to maturity of 12%. What is the price of the bond?

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