Question

Answer the following questions as detailed as possible:

Question #1 – Time Value of Money Please give an example from your own personal or professional experiences (life/career) that involves the Time Value of Money.

The Time Value of Money defined as in Chapter 4 as: Present Value, Future Value, Present Value of an Annuity, Future Value of an Annuity, Amortization. It can be one of these above or multiple.

Explain the example and how this/these money valuation tools fit into your example. Please be thorough and specific.

Question #2 – Debt Valuation

Part I – How are corporate bond ratings determined? Why is there so much variation in the coupon rates and prices of various bonds?

Part II - Finally, why do some bonds sell for less that their face value, while others sells at a premium?

Question #3 – Stock Valuation & Risk DOW DROPOUT - General Electric will drop out of the Dow industrials next week, a milestone in the decline of a company that once ranked among the mightiest of blue chips and was a pillar of the U.S. economy. It will be replaced by drugstore retailer Walgreens Boots Alliance, the latest sign of the rise of the global consumer economy and the post crisis boom in debt issuance that has fueled a global deal-making frenzy.

The decision to drop GE, an original member of the Dow that has been a part of the 30-stock index continuously since 1907, marks the latest setback for a conglomerate that once was the most valuable U.S. company, but has been hit hard in recent years by the unraveling of its finance business and competitive problems. GE shares have tumbled 55% over the past 52 weeks, erasing more than $100 billion in wealth.

As an investor in General Electric, please give examples what the above means in relation to an investment? Let’s say you purchased 100 shares of General Electric common stock on January 1, 2002.

Question #4 – Risk Evaluation Select a company from the Dow Jones Industrials Index and prepare a risk analysis.

You risk analysis should include minimally below:

Credit rating

Beta value

CAPM required return on equity investment

CAPM rates to use:

Risk Free Interest Rate = 2.85%

Market Risk Return = 8.25%

Answer 1

Answer 1)  Time Value of Money explains the change in market value of money with change in time and prevailing interest rate , mainly as Future value or present value term .

Fo example a amount of $ 1 million is invested in Fixed deposit for 2 years with rate of 12%

FV = P(1+r)^n = 1(1+.12)^2 = 1.254 miilions.

Answer 2)

Part 1 : A bond rating is a process where a grade assigned to a bond to tell about its credit quality. Generally independent rating services provider institution does a research and evaluations of a bond issuer's financial strength or its ability to pay a bond's principal and interest on time. Bond ratings are generally expressed as letters ranging from "AAA," which is the highest grade, to "C" or "D" ("junk"), which is the lowest grade.

The Coupon rates and prices is decided by many factors , as rating of bond , prevailing interest rate , market condition , competition offering etc.

Part II ) The selling on less than face value ,dicount , or higher than face value , premium, depend on the interst rate situation and types of bond . Like a zero coupon bond always sold on discount , dicounted value in such bond depend on time to maturity and prevailing interest rate .

Answer 3) GE shares have tumbled 55% over the past 52 weeks, erasing more than $100 billion in wealth. The situation clearly indicate a sharpe fall in market price in GE share in stock market . the fall of 52% indicate change in price by -52% from date of purcahse . Person bought 100 share of GE on 1st Jan 2002 , let say on $30 per share , total invesment = 30*100 = $ 3000 .Today the share is trading at $30 *(1-52%) = $14.4 . the current market valuation of investment is $14.4 *100 = $ 1440 , indicates net fall of 52% in invested capital .

Answer 4) Beta = COV ( r_s ,r_I) /var (r_i) , where r_s = return of stock and r_i = return of index.

CAPM, R = risk free + beta (return from market - risk free)

Month	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28	29	30	31	32	33	34	35	36	37
Sale date	35582	35612	35643	35674	35704	35735	35765	35796	35827	35855	35886	35916	35947	35977	36008	36039	36069	36100	36130	36161	36192	36220	36251	36281	36312	36342	36373	36404	36434	36465	36495	36526	36557	36586	36617	36647	36678		Average return		Standard Dev	Beta
GM	-0.86995	1.710171	14.31172	-2.62739	10.83401	-1.20823	-8.00688	6.896552	-0.41824	17.14	-2.11712	1.760057	3.741617	-0.88465	3.833245	-17.0466	-4.77851	20.29924	10.07982	2.512648	30.48698	-10.9758	5.181951	9.7295	-8.76355	-1.99462	-8.50214	7.967033	-4.35564	10.44177	5.367273	5.300939	14.2302	-12.9032	16.44444	9.291357	-24.6844		2.63307		10.88035	-0.58307
DJIA	4.485357	5.939172	6.10839	-6.97605	5.156892	-4.25563	4.413641	-1.30861	2.523061	5.459818	3.717582	3.143211	-2.45652	1.415543	-2.89468	-10.9177	-2.48996	14.06637	4.909059	0.524331	1.789155	-0.22385	5.444954	12.02318	-3.79884	4.437037	-3.79942	2.742073	-6.07869	3.655407	3.285621	3.265296	-2.78644	-8.17975	10.69253	-3.65481	-1.47598		1.294615		5.474731

CAPM return = 2.85 -0.58 (8.25-2.85) = -0.282%