1. TM 661 Chapter 3 Solutions 1 Chapter 2 Solutions 1
5) If you desire a real return of 8% on your money, excluding inflation, and inflation is running 3%, what combined discount rate should you be seeking?
Soln:
i = d + f + df
= (.03)
= = 11.24%
6) Mellin Transformers Co. uses a required return of 15% in all alternative evaluations. Inflation is running at 5%. What real discount rate, exclusive of inflation, are they implicitly using?
d = (i - f)/(1+f)
= ( )/(1.05)
= = 9.52%
Chapter 2
Solutions 1

2. TM 661 Chapter 3 Solutions 1 Chapter 2 Solutions 2
16) Dr. Schulz is considering purchasing a bond having a face value of $2,500 and a bond rate of 10% payable semi-annually. The bond has a remaining life of 8 years. How much should she pay for the bond in order to earn a return on investment of 14% compounded semiannually?
Soln:
The bond earns 10% per year or 5% semi-annually. 5% of 2,500 = years remaining equates to 16 semi-annual periods. The physical cash flow for the bond is then shown below.
Since Dr. Schulz wants 14% compounded semi-annually (7%) per period, we can compute the Present worth of the cash flow by
= 125 (P/A, 7, 6) + 2,500 (P/F, 7, 16)
= 125 (9.4466) + 2,500 (.3387)
= 2,027 P
2,500
Chapter 2
Solutions 2