Practice Problems
ECO 215 / Waters
1) If you deposit $2000 at an annual interest
rate of 25% and hold it for 3 years, how much
money will it return? Use your calculation to
make a statement in terms of present value.
2) If the market interest rate is 20%, what is the
present value of a payment of $224, two years
from today? What if the market rate is 10%. At
the lower interest rate, is the present value
higher or lower? Explain the intuition behind
your answer.
3) A special type of bond pays $100 after one
year and $300 after five years. At a market
interest rate of 5%, what is the present value of
the bond?
4) A discount bond pays a fixed amount at a
fixed date in the future. How much would an
investor be willing to pay for a discount bond
that pays $500 after one year if the market
interest rate is 2%?
5) A coupon bond has a $1000 face value, a
coupon rate of 2% and a time to maturity of two
years. If the yield to maturity of the bond is 3%,
what is the price?
Answers:
1) $3906.25, If the interest rate is 25%, the present value of a payment of $3906.25 three years in the future is $2000.
2) At 20% PV=$155.56, at 10% PV=$185.12, At the lower rate the present value is higher. At a lower interest rate, money
today is worth less, so future payments are relatively more valuable.
3) $330.30
4) $490.20
5) $980.87