Capital Budget

Topics: Bond, Investment, Net present value Pages: 1 (252 words) Published: February 23, 2013
Question 1
If I buy the T-note, FV=\$1000
If I leave the money in the bank,
FV=PV(1+Inom/M)MN+\$10=900（1+5%/365)270+\$10=\$943.91
\$1000>\$943.91, so the greatest future wealth is \$1000
If I buy the T-note， PV=FV/(1+Inom/M)MN=1000/(1+5%/365)270=\$963.95 If I don’t buy it, PV is \$910.
\$963.69>\$910, the greatest wealth today is \$963.69
Leaving the money in the bank, the effective rate of return is: EFF=(1+Inom/M)M-1=（1+5%/365)365-1=5.13%
For the T-note 1000=910(1+I)270, I=0.034936%,
EFF=(1+Inom/M)M-1=(1+0.034936%)365-1=13.60%
The greatest effective rate of return is 13.60% per month
From the three solution methods above, I should invest in the T-note.

Question 2
Down payment is \$35000
Monthly payment is \$1600
Monthly rate= 4.49%/12=0.3742%
Using the financial calculator, N=360, I=0.3742%, PMT=1600, FV=0. PV=\$316,133.6481 PVtotal=\$35000+\$316,133.6481=\$351,133.6481
The maximum price of the house I can afford is \$351,133.65
Face value
Coupon payment
Discount rate

Annuity(PMT) +Face value(PV)=BOND PRICE
FV=FINAL PAYMENT
PMT=coupon payment each compounding period
N=compounding period
I/Y=period compounding rate
PV=FACE VALUE(MARKET VALUE) PRESENT VALUE OF THE BOND

discount bond PB

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