Need help with finance homework!?

Question a) is a bit strange. The obvious answer seems to be 9 years. The company is obligated to provide the funds during that period. As for part b), you can start by diagramming the problem:

pv ---1---2---3---4=fv---5 ---6---7---8---9

An investment has to be made at year 0=pv which is the present value of a sum that will grow to an appropriate amount at year 4. That amount is the present value of an ordinary annuity of five $10,000 rents occurring in years 5 through 9. So you have to find PV of the annuity, use it as fv and discount it to year 0.

PMT = $10,000

n = 5

i% = 10%

PV = ? == $37,807.87

fv = $37,807.87

N = 4

i% = 10%

pv = ? == $25,891.58

As for the bonds, there seems to be multiple answers available. One strategy is to buy $42,000 of 5-year bonds now for $25,892 which will give you enough to fund the annuity in year 5 and pay the first $10,000 pension. Then invest in 5-year zero-coupon bonds again to provide for the remaining payments. But that does not include 10-year bonds. Another approach is to buy 10-year bonds and sell $10,000 worth of them t each pension date. The face value would have to be calculated, but this problem again requires buying a combination of bonds, not just 10-year bonds. The whole issue is predicated on the assumption that the bonds an be bought to yield 10 percent. This is not always the case, so the problem becomes fairly artificial. Ideally, the firm should buy $10K of 5-year bonds, $10K of 6-year bonds, etc. so that each bond matures on the pension anniversary date. I'm not sure I understand exactly what part b) requires.

no