If the going market rate of interest is 4%, how much would you have to invest ea
ID: 2469433 • Letter: I
Question
If the going market rate of interest is 4%, how much would you have to invest each and every year to have $1,000,000 at the end of 20 years?
If the going market rate of interest is 12%, how much would you have to invest each and every month to have $1,000,000 at the end of 3 years?
You win the lottery for $20 million, payable in a lump sum or $1 million per year for 20 years. If the market rate of interest is 8%, what would your lump sum payment be before taxes?
You need to save $30,000 for a new car, and you estimate that your car will last another 3 years at best. If the market rate of interest is 5%, how much would you need to save each year for the next three years to purchase a car costing $30,000?
Problem #2
XYZ issues a $1,000,000 bond that matures in 5 years on January 1, 2012. The bond pays interest annually and has an interest rate of 4% and the market rate is 6%.
Calculate the value of the bond.
Give the entry to record the note on January 1, 2012.
Give the entry required on December 31, 2012, which should include the payment of interest. Use the straight-line method.
Give the entry required on December 31, 2012, which should include the payment of interest. Use the effective-interest method.
Problem #3
XYZ issues a $1,000,000 bond that matures in 5 years on January 1, 2012. The bond pays interest annually and has an interest rate of 4% and the market rate is 2%.
Calculate the value of the bond.
Give the entry to record the bond on January 1, 2012.
Explanation / Answer
1- USING pmt function in MS Excel
=PMT(4%,20,0,1000000,0) = 33581.75 per year
2- =PMT(1%,36,0,1000000,0) = 23214.31 i = 12/12 =!% nper = 12*3 = 36 months
3- present value of lum sum payment after 20 Years= FV /(1+r)^n = 20000000/(1.08)^20 =
429096.4
4- =PMT(0.0041,36,30000,0)= 898 to will need to save to buy a car of 30000 i = 5/12 =.41% nper = 12*3 = 36
5-
429096.4
1 40000 0.943396 37735.85 2 40000 0.889996 35599.86 3 40000 0.839619 33584.77 4 40000 0.792094 31683.75 5 1040000 0.747258 777148.5 value of the bond 915752.7 January 1,2012 cash debit 915752.7 discount on issue of bonds 84247.28 credit bonds payable 1000000 December 31 2012 interest expense debit 40000 credit cash 40000 effective interest method dec 31 2012 interest expense debit 54945.16 credit cash 40000 credit discount on issue of bond 14945.16 1 40000 0.980392 39215.69 2 40000 0.961169 38446.75 3 40000 0.942322 37692.89 4 40000 0.923845 36953.82 5 1040000 0.905731 941960 value of the bond 1094269 January 1,2012 cash debit 1094269 credit premium on issue of bonds 94269.19 credit bonds payable 1000000