| Directions: Answer the following questions on a separate document. Explain how you reached the answer |
| or show your work if a mathematical calculation is needed, or both. Submit your assignment using the |
| assignment link in the course shell. This homework assignment is worth 100 points. |
| Use the following information for Questions 1 through 5: |
| Assume that you are nearing graduation and have applied for a job with a local bank. The bank’s |
| evaluation process requires you to take an examination that covers several financial analysis techniques. |
| The first section of the test asks you to address these discounted cash flow analysis problems: |
| 1. What is the present value of the following uneven cash flow stream ?$50, $100, $75, and $50 at the |
| end of Years 0 through 3? The appropriate interest rate is 10%, compounded annually. |
| 2. We sometimes need to find out how long it will take a sum of money (or something else, such as |
| earnings, population, or prices) to grow to some specified amount. For example, if a company’s sales |
| are growing at a rate of 20% per year, how long will it take sales to double? |
| 3. Will the future value be larger or smaller if we compound an initial amount more often than annually— |
| for example, every 6 months, or semiannually—holding the stated interest rate constant? Why? |
| 4. What is the effective annual rate (EAR or EFF%) for a nominal rate of 12%, compounded |
| semiannually? Compounded quarterly? Compounded monthly? Compounded daily? |
| 5. Suppose that on January 1 you deposit $100 in an account that pays a nominal (or quoted) interest |
| rate of 11.33463%, with interest added (compounded) daily. How much will you have in your account |
| on October 1, or 9 months later? |
| Use the following information for Questions 6 and 7: |
| A firm issues a 10-year, $1,000 par value bond with a 10% annual coupon and a required rate of return is |
| 10%. |
| 6. What would be the value of the bond described above if, just after it had been issued, the expected |
| inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now |
| have a discount or a premium bond? |
| 7. What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a |
| premium or a discount bond? |
| 8. What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for |
| $887.00? That sells for $1,134.20? What does a bond selling at a discount or at a premium tell you |
| about the relationship between rd and the bond’s coupon rate? |
| 9. What are the total return, the current yield, and the capital gains yield for the discount bond in |
| Question #8 at $887.00? At $1,134.20? (Assume the bond is held to maturity and the company does |
| not default on the bond.) |
Categories: