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FIN - Time Value of Money Exercise




Question;Time Value of Money ExerciseNote: Unless otherwise stated, assume that interest is calculated on an annual basis1) Ian invests $1000 today in a 3 year CD paying 3.75% annually. He receives the fullamount of principal and accrued interest in 3years. How much will he receive in 3years?NiPVPMTFV2) How much would Sylvia have to invest in a CD today to receive $1225 in 4 yearstime if the interest rate payable on the CD is 2.10%NiPVPMTFV3) A zero coupon bond is sold at a discount and pays no interest during its life. Johninvests $900 in zero coupon bond which promises to pay $1100 in 5 years time. What isthe rate of return on the investment?NiPVPMTFV4) Maggie has the opportunity to invest $1000 in a 5 year CD. She has the option toreceive a 4.65% return, compounded quarterly, 4.75% compounded semi-annually, or4.85% compounded annually. What option will give her the highest total return andhow much will she receive in 5 years time?QuarterlyNiPVPMTFVSemi-annuallyNiPVPMTFVAnnuallyNiPVPMTFV5) Chris invests $1000 in a 10 year ordinary annuity when prevailing interest rates are3.5%. How much will he receive annually?NiPVPMTFV6) Using the calculator and the Rule of 72s, how long will it take a $4000 investment todouble if the interest rate is 7.3%?Calculator MethodNiPVPMTFVRule of 72s7a) Helena purchases a condo and obtains a $250,000 fully amortizing level payment 15year mortgage bearing an (annual) interest rate of 6.75%. How much will her monthlyblended principal and interest payment be?NiPVPMTFV7b) For months 1,2 and 3 of the mortgage, determine how much of the total payment isprincipal and how much is interest and construct an amortization tableMonth BeginningPrincipal123PaymentInterestAmortization ofPrincipalEndingPrincipal2500008) Johnson Corp is considering a capex project that will require an investment of$150,000. It will have a 5 year lifetime and will return the following amounts:Year 1Year 2Year 3Year 4Year 5$20,000$25,000$80,000$70,000$30,0008a) If at the end of year 5 the project has no salvage value, what is the companysexpected annual rate of return (IRR)?8b) If at the end of year 5 the project has a salvage value of $20,000, what is thecompanys expected annual rate of return? [Hint: The salvage value will add to the cashflow that Johnson receives in year 5]Assume annual payments unless otherwise specified1) What is the current value of a 10 year bond with a 8% coupon rate if the currentmarket interest rate is 7.75%?NiPVPMTFV2) A zero coupon bond is sold at a discount and pays no cash interest during its lifetime.At maturity is pays the face value of the bond. What is the current value of a 8 year zerocoupon bond if the current market interest rate is 4.85%NiPVPMTFV3) What is the current value of a10 year bond with a coupon rate of 8% (annual) withsemi-annual payments if the current market interest rate is 7.9% (annual)?NiPVPMTFV4) What is the current value of a 10 year bond with a coupon rate of 8% with quarterlypayments if the current market interest rate is 7.9%?NiPVPMTFV5) What is the Yield to Maturity (YTM) and Yield to Call (YTC) for a bond which iscurrently priced at 1060 if the bond has a coupon of 6%, matures in 8 years but could becalled at a price of 1030 in 3 years.YTMNiPVPMTFVNiPVPMTFVYTC6 a) Calculate the Value of the Bonds under the following assumptions:MarketInterest Rate =8%Maturity3 Yr15 yr1,0001,0003% couponPeriod 18% coupon15% couponMarketInterest Rate =6%Maturity3 Yr15 yr3% couponPeriod 28% coupon15% coupon% Change in Bond Value from Period 1 to 23 Yr15 yr3% coupon8% coupon15% coupon6b) What do you conclude about the relative sensitivity of bond prices to changes ininterest rate?1) Longer maturities relative to shorter maturities?2) High coupon bonds relative to lower coupon bonds?


Paper#48169 | Written in 18-Jul-2015

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