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)
1. 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)
1. 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)
1. 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

1. 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)
1. 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)
1. 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

1. 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)
1. 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)
1. 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%)