ECONOMICS 308
V. Marra
Financial Concepts and Applications
Basic Discounting
1. What is the price of a 10-year, $1,000 face value zero-coupon bond using a 4% rate of discount?
2. What price results if the rate of discount is 5%?
(BOND PRICES and INTEREST RATES are INVERSELY PROPORTIONAL)
3. What is the YTM if this bond could be purchased for $600?
4. What is the price of a 9-month, $1,000 face value zero-coupon bond using a 6% rate of discount?
5. If a 9-month, $2,000 face value bond is purchased for $1,800, what is the YTM?
Continuous Streams
6. You borrow $50,000 for a loan to go to college. The lender gives you this money at 7% interest per year for 10
years. What will you monthly payments be during the 10-year payback period?
7. How much is $20 million in lottery winnings worth? Use a discount factors of 4% and 7% and note the
difference. (Remember that PRICES (PV) and INTEREST RATES are INVERSELY PROPORTIONAL)
8. Todd Moitz wins the California Lottery and for $49 Million. His payment options are $2.45 million per year
for 20 years, or a lump-sum payment of $32 million. What discount rate has the state of California used in
offering these options.
(Solving for i can be numerically intensive. A financial calculator or EXCEL makes it easier.)
