03 Jul Two finance questions
1. As the risk manager for the above chain of restaurants, you have been asked to help settle a liability claim by a customer who was eating in the restaurant. You have assumed a 5% interest rate and have offered the following options to the plaintiff. Explain to your board of directors which of these is best for the restaurant. Calculate the
a. ______________Offering the plaintiff a lump sum today of $200,000
b. ______________Offering the plaintiff a perpetuity of $19,000 per year
c. ______________Offering the plaintiff an annuity of $15,000 per year for 12 years
d. ______________Offer the employee $50,000 today and monthly payments of $1,000 for 20 years.
e. ______________Offer the plaintiff a 15-year annuity of monthly payments of $1,500
2.Calculate the price of a 15-year 4 percent annual coupon bond. Assume the market is yielding 5 percent on similarly risky instrument. Please show your work and explain why this is a premium or a discount bond.
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