Response: We Use a Present Value Table to Look

question 9

Multiple Choice

Response: We use a present value table to look up the value of the $1000 principal to be paid 8 years or 16 semi-annual periods. Looking at the 3% row (rate per semi-annual period) , we find the factor of .623. Multiplying by $1000, the investor is selling the value of the principal for $623.00. Using a present value of an annuity table, we also look up R=3% and N=16 to find the factor 12.561. Multiplying 12.561 times the $40 semi-annual coupon, we find our investor is selling the remaining stream of 16 coupon payments for $502.44. Thus the price of the bond is $623.00 + $502.44 = $1,125.44. But the bond originally cost our investor $1,000, so the capital gain is 125.44 (using financial calculator, the answer is $125.61) . Section: Measuring Bond Yields.
-Now let's look from the view of the investor who buys an 8 percent semiannual bond with 8 years remaining to maturity, when market rates are 6%. If this investor pays $1,125.44 for the bond, what is his current yield?

• A) 3.55 percent
• B) 7.11 percent
• C) 8.00 percent
• D) 10.00 percent

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Definitions:

Economic Motivation

The driving forces behind economic activities, including incentives and desires that influence the economic decisions of individuals or organizations.

John Rawls

A philosopher known for his theory of justice as fairness, which argues for a system of distributing social and economic goods in a manner that benefits the least advantaged members of society.

Moral Equality

The principle that all individuals are equal in moral worth and should be treated as such.

Equality Of Opportunity

The principle that all individuals should have the same chances to pursue their goals without unfair barriers.