Assignment1 Solution
Assignment1 Solution
Assignment1 Solution
Assignment 1
Dr. Pauline Fu
Assignment 1 (5%)
Due June 11 28 by 7:00 PM
Introductory Financial Mathematics
MATH 2P75, Spring 2014
Department of Mathematics and Statistics
Brock University
Objectives (week 1 to week 4)
Calculate interest, maturity value (future value), and present value in both
stream of payments.
Compute present value for treasury bills.
Compute interest and balances for demand loans and lines of credit.
Construct repayment schedules for loans.
Calculate the income yield, capital gain yield, and rate of total return on
stocks and mutual funds.
4
1 0.09 12
= $3296.00
Size of first payment = $3200
Spring 2014
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MATH2P75
Assignment 1
Dr. Pauline Fu
8
1 0.09 12
= $3392.00
Size of second payment = $3200
$3296.00
$3392.00
1
5
1 0.16 12
1 0.16 12
Sum of the present values of the two payments =
+
= $3252.63 + $3180.00
= $6432.63
The finance company should be prepared to pay $6432.63 today for the loan contract
a.
Price =
b.
$100,000
1 0.037 168
365
= $98,325.50
Market
return
(i)
(ii)
(iii)
c.
Market
value
4%
$100,000
83
1 0.04 365
= $99,098.61
3.7%
$100,000
83
1 0.037 365
= $99,165.65
3.4%
$100,000
83
1 0.034 365
= $99,232.78
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MATH2P75
Assignment 1
(ii)
(iii)
Dr. Pauline Fu
r=
$840.15
85
$98,325.50 365
= 0.03669 = 3.669%
r=
$907.28
85
$98,325.50 365
= 0.03962 = 3.962%
3.Suppose that the current rates on 60- and 120-day GIC are 5.5% and
5.75% respectively. An investor is weighing the alternatives of
purchasing a 120-day GIC versus purchasing a 60-day GIC and then
reinvest its maturity value in a second 60-day GIC. What would the
interest rate on 60-day GICs have to be 60 days from now for the investor
to end up in the same financial position with either alternative?
Suppose that the amount invested is $1000. Its maturity value in a 120-day GIC will be
120
1 0.0575 365
= $1018.90
$1000
If instead, the $1000 is invested in a 60-day GIC,
60
1 0.055 365
=$1009.04
Maturity value = $1000
For this amount to grow to $1018.90 in another 60 days, it must earn
Interest = $1018.90 $1009.04 = $9.86
The interest rate on the second 60-day GIC would have to be
$9.86
I
60
$1009.04 365
r = Pt =
= 0.05944 = 5.944%
Number
of days
-24
28
31
Interest
rate
-6.75%
6.75
6.75
Interest
-$17.75
17.70
16.26
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Accrued
interest
-$17.75
17.70
16.26
Payment
(Advance)
-$600.00
600.00
600.00
Principal
portion
-$582.25
582.30
583.74
Balance
$4000.00
3417.75
2835.45
2251.71
MATH2P75
15-May
21-May
21-Jun
5-Jul
21-Jul
21-Aug
Assignment 1
24
6
31
14
16
31
6.75
6.50
6.50
6.50
6.25
6.25
9.99
2.41
9.19
2.68
2.94
2.54
9.99
12.40
9.19
2.68
5.62
2.54
Dr. Pauline Fu
600.00
600.00
587.60
590.81
600.00
481.46
594.38
478.92
2251.71
1664.11
1073.30
1073.30
478.92
0.00
Note: the stroke indicates that the interest has been paid.
42
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MATH2P75
Assignment 1
Dr. Pauline Fu
9. A $1000 face value strip bond has 19 years remaining until maturity.
What is its price if the market rate of return on such bonds is 5.9%
compounded semi-annually? At this market rate of return, what will
be the increase in the value of the strip bound during the fifth year of
ownership?
Current price:
PV = FV 1 i
1.0295 28
Price in 4 years:
PV = $1000 1.0295
38
= $1000 1.0295
= $331.28
= $418.03
Price in 5 years:
30
PV = $1000
= $443.06
10.A loan contract called for a payment after two years of $1500 plus
interest (on this $1500) at 8% compounded quarterly, and a second
payment after four years of $2500 plus interest (on this $2500) at 8%
compounded quarterly. What would you pay to purchase the contract
18 months after the contract date if you require a return of 10.5%
compounded semiannually?
Payment due in 2 yr.:
Payment due in 4 yr.:
8
16
FV = $1500 1.02 = $1757.49
FV = $2500 1.02 = $3431.96
The fair market value of the note, 18 months after the issue date, is the
present value on the date of sale of the scheduled payments. That is,
1
5
Price = $1757.49 1.0525 + $3431.96 1.0525
= $1669.82 + $2657.25 =
$4327.07
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MATH2P75
Assignment 1
Dr. Pauline Fu
11.A portfolio earned -13%, 18%, 5%, 24%, and -5% in five successive
years. What was the portfolios five-year compound annual return?
PV
1
n
$126.98
= $100
= 0.0489
= 4.89%
1
5
FV
$895.67
ln
PV
$800
n
ln 1+ i = ln 1.00 6
.
0.11296
= 0.0066445
= 17.00 periods
Terry made the payment 17 months after March 1,
that is, on August 1 of the following year.
ln
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