1. Time value of money (25 points) You are worried about saving enough money for the college education of your two kids, currently aged 7 and 9. Both will go to college at age 18 and will graduate in...

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Answered Same DayFeb 28, 2021

Answer To: 1. Time value of money (25 points) You are worried about saving enough money for the college...

Nitish Lath answered on Mar 02 2021
142 Votes
Solution 1:
    Year
    Cash requirement
    Present value factor @6%
    Present value
    9
    65000
    0.592
    38473

    10
    65000
    0.558
    36296
    11
    130000
    0.527
    68482
    12
    130000
    0.497
    64606
    13
    65000
    0.469
    30475
    14
    65000
    0.442
    28750
     
     
     
     
     
    Total present value
     
    267082
     
    Total savings
     
    160000
     
    Total fund required to be saved
     
    107082
     
    Cumulative factor of 6% for 6 years
     
    4.9173
     
     
     
     
     
    Saving for each year
     
    21776
Solution 2:
Calculation of price of the bond:
    Time to maturity
    40
    Face value
    $1,000
    Coupon rate
    2.50%
    Yield to maturity
    6%
     
     
    Interest payment
    $25.00
    Cumulative factor of 3% in 40 years
    23.114772
    PV of interest
    $577.869
     
     
     Redemption value
    1000
    Present value of 3% in the 40th year
    0.3066
    Present value
    306.557
     
     
    Price of the bond
    $884.43
Calculation of price of bond when YTM rises to 8%
    Time to maturity
    40
    Face value
    $1,000
    Coupon rate
    2.50%
    Yield to maturity
    8%
     
     
    Interest payment
    $25.00...
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