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Math Help - Business Problems.

  1. #1
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    Business Problems.

    Having a lot of trouble with these following three problems. Figured out everything else but these problems are driving me crazy...

    1. Mr. Lehoc has just retired after 23 years with the company. His total pension funds currently have an accumulated value of $351,000, and his life expectancy is 20 years. His penshion fund manager assumes he can earn 15% return on his assets. What will be his yearly annuity for the next 20 years?

    2. Jennice won in a lottery. Now she has to select one of the three following alternatives: $1,000 now, $200 a year for ten years, or $4,000 at the end of 10 years. Assuming she could earn 12% annually, which alternative should she use?

    3. Apple Software has $1,000 par value bonds outstanding with 12% coupon. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is 8%.


    Any kind of help will be appreciated.
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  2. #2
    Senior Member
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    Feb 2008
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    Berkeley, Illinois
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    Quote Originally Posted by bbk398 View Post
    Having a lot of trouble with these following three problems. Figured out everything else but these problems are driving me crazy...

    1. Mr. Lehoc has just retired after 23 years with the company. His total pension funds currently have an accumulated value of $351,000, and his life expectancy is 20 years. His penshion fund manager assumes he can earn 15% return on his assets. What will be his yearly annuity for the next 20 years?

    2. Jennice won in a lottery. Now she has to select one of the three following alternatives: $1,000 now, $200 a year for ten years, or $4,000 at the end of 10 years. Assuming she could earn 12% annually, which alternative should she use?

    3. Apple Software has $1,000 par value bonds outstanding with 12% coupon. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is 8%.


    Any kind of help will be appreciated.
    Assuming payments are made at the end of the period for Question 1 and Question 2, we get:

    Question 1) Answer is 3426.28. Go here -> Annuity Immediate Accumulated Value

    Calculate Payment. It will show you the math and the answer

    Question 2) We want to compare the value of everything now, which is time 0. Go here for option 2: Annuity Immediate Present Value

    Option 2 solving for Present value is 1130.04

    Option 3, we need to discount 4000 back to time 0 which is 10 years.
    \frac {4000}{(1.12)^{10}} = 1287.89

    Because Option 3 has the greatest Present Value, she should take that option.

    Question 3) Go here --> Bond Price Formulas

    I get 1426.99 using all 4 pricing methods. I assumed from your problem that the bonds were redeemable at par value and coupons were paid once a year.

    Let me know if you have questions.
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