Review Exercises

1. Guido placed $28,300 into a five-year regular interest GIC with interest of 6.3% compounded semi-annually. Determine the total interest Guido will earn over the term. (Answer: $8,914.50)

2. An eight-year, $35,000 noninterest-bearing promissory note is discounted 6% compounded quarterly and sold to a finance company three years and nine months after issue. What are the proceeds of the sale? (Answer: $27,173.48)

3. On April 27, 1990, Graham purchased a $100,000 face value 25-year Government of Quebec strip bond. The market yield on such bonds was 13.3177%. What was the purchase price for the strip bond? (Answer: $3,982.49)

4. In retirement, Bill determined that he could safely invest $50,000 into a nonredeemable five-year GIC with a posted rate of 5.35% compounded semi-annually. Calculate the maturity value and the amount of interest earned on the investment. (Answer: FV = $65,105.42, FV = $65,105.42)

Applications

5. Entegra Credit Union offers a five-year escalator GIC with annual rates of 1.65%, 2.4%, 2.65%, 2.95%, and 3.3%. Determine the maturity value and total interest earned on an investment of $6,000 along with the equivalent five-year fixed rate. (Answer: FV = $6,817.80, I = $817.80, 2.5885% compounded annually)

6. A 21-month $6,779.99 promissory note bearing interest of 7.5% compounded monthly was sold on its date of issue to a finance company at a discount rate of 9.9% compounded monthly. Determine the proceeds of the sale. (Answer: PV = $6,503.10)

7. On February 7, 1990, a $100,000 face value 25-year Government of Saskatchewan strip bond was purchased for $9,365.85. On February 7, 2005, the investor sold the strip bond for $65,900.

a) What was the posted yield on strip bonds on the date of issue? (Answer: 9.7003% compounded semi-annually)

b) What was the posted yield on strip bonds when it was sold? (Answer: 4.2141% compounded semi-annually)

c) What actual semi-annual rate of return did the original investor realize on the strip bond investment? (Answer: 13.4394% compounded semi-annually)

Challenge, Critical Thinking, & Other Applications

8. On October 10, 1995, a $100,000 Government of Canada 30-year strip bond was purchased at a posted yield of 8.1258%. The investor sold the strip bond on October 10, 2005, and realized an actual yield of 15.9017% on the investment. What was the prevailing yield on strip bonds when the strip bond was sold on October 10, 2005? (Answer: 4.3435% compounded semi-annually)

9. From 2004 to 2008, the average family after-tax annual earnings increased from $68,200 by 2.2677% per year. The inflation rate during that time period was 1.71%, 2.43%, 2.19%, and 3.13% in successive years, respectively. Determine the amount that Canadian family after-tax annual earnings have increased or decreased in 2008. Show calculations to support your answers. (Answer: after-tax annual earnings decreased by $280.57)

10. The research and development department forecasts that it will require $100 million in funding for a project scheduled for implementation four years from today. If the company wants to place $80 million into a $500 million 25-year strip bond, what is the minimum by which the yield in the market needs to change for the department to have sufficient funds when the project is started? (Answer: Increase in bond yield required = 7.8127% − 7.4663% = 0.3464%)