Question

In: Accounting

For a person that requires a10 percent annual return, which is better $1.00 today or $1.15...

For a person that requires a10 percent annual return, which is better $1.00 today or $1.15 in one year?

Which is greater, the future value with compound interest of 4% or the future value with simple interest of 4%?

Which is greater, when 4% interest is compounded more than once a year, or 4% per year?

You have the right to receive $1000 in five years. Is the present value higher when the interest rate is 4% or when the interest rate is 8%.

If you want to know how long it will take to convert $100 to $400 at 8% interest, what type of problem is this and what function would you use?

If you want to know what you will have in 5 years at 8% if you invest $100 now, what type of problem is this and what function would you use?

If you want to know how much you need today to have $400 in 5 years at 8%, what type of problem is this and what function would you use?

If you want to know what rate of return is necessary to convert $200 to $600 over a 4 year period, what type of problem is this and what function would you use?

What is the difference between an ordinary annuity and an annuity due?

What is a perpetuity and how would you find the value of a perpetuity?

If small amounts of money occur before one large amount of money, what type of problem is this?

If you buy a house and take out a 5% mortgage and make payments over the next 30 years, what type of problem is this?

Loan A has a $100,000 borrowed at 10% for 10 years. Loan B has $100,000 borrowed at 11% for 10 years. Which loan will have the higher monthly payment?

Loan A has a $100,000 borrowed at 10% for 7 years. Loan B has $100,000 borrowed at 10% for 10 years. Which loan will have the higher monthly payment?

Tom puts $500 into a savings account for 20 years and earns 10% interest. Jerry puts $600 into a savings account for 20 years and earns 10% interest. Who has the higher future value?

Tom puts $500 into a savings account for 20 years and earns 8% interest. Jerry puts $500 into a savings account for 20 years and earns 10% interest. Who has the higher future value?

Tom puts $500 into a savings account for 10 years and earns 10% interest. Jerry puts $500 into a savings account for 10 years and earns 10% interest. Who has the higher future value?


18. Jesse just won the state lottery. He has been given the option of receiving either $5 million a year for the next 30 years, with the first payment paid today. Is this a present value or future value of an annuity due?

What is the difference between the coupon rate and the market rate or yield?

When, in a bond’s life, would the market rate (or yield) equal the coupon rate?

Why do these rates often diverge over time?

Do most corporations pay semi-annual interest payments or annual payments?

Do debtholders share in the upside of corporations or do they just get their interest payments and face value back (regardless of how well the company does in the future)?

What happens to bondholders when the company does poorly in the future and cannot make the interest payments?

Are all bondholders treated the same or do some bondholders have priority over others.

What is a debenture?

What are some typical secured bonds?

What is a mortgage?  

Would investors want higher interest payments (higher yields) or lower interest payments (lower yields).

Would Harley Davidson or Walmart pay a higher interest rate on a 20 year bond?

What influence does the number of years to maturity have on the risk and consequently the yield of a bond?

What do you call the agreement that delineates what the corporations will do during the life of the bond?

What is a sinking fund?

What are the two most common protective covenants in most corporate bonds?

Are most corporate bonds callable or not callable?

Is the call option good for the corporation or good for the investor?

When do corporations call their bonds when interest rates go up or when interest rates go down?

Who are the two largest credit rating agencies for corporate bonds?

What risk is the rating agencies rating when they rate bonds?

Securities that are rating with the top four credit ratings are considered what?

What are the inferior rated (less than the top four ratings) bonds called?

Are most bonds traded like stock or bought and sold (or held to maturity) through investment bankers?

PROBLEMS PORTION OF THE TEST:

Problem Section:

If an investment is expected to return of 11.75 percent in the future, a $200,000 investment will grow to how much in 25 years?

The answer is _______________.

To intend to buy a retirement home in 18 years and you expect that you will need $370,000 at the end of 18 years. If funds can be invested at an effective return of 7 percent a year, how much must you invest today to have the needed amount?

The amount needed to invest today is _________.

How long does it take to have a million dollars if you have $50,000 today and can earn 9% annually?

The number of years is _______________.

If you received a 18 cent dividend 12 years ago and you now receive a 77 cent dividend, how much has the dividend grown over this time period? (or at what rate of return has this dividend grown)?

The growth rate is _______________.

You decide to max-out your annual investment into your Individual Retirement Account and invest $5,500 at the end of each year for the next 32 years. Because you were frightened by the recent two market declines in the last 17 years, you decide to invest in a bond portfolio expected to earn only 4.8% annually (assume annual interest payments at the end of the year). How much will you have at the end of this investment period?

The answer is _______________.

What is the answer if you put the money into the account at the beginning of the year instead of the end of the year _________.

You decide to max-out your annual investment into your Individual Retirement Account and invest $5,500 at the end of each year for the next 32 years. If you are NOT frightened by the recent two market declines and decide to invest in a large stock portfolio, you expect to earn 10% annually. How much will you have at the end of this investment period?

The answer is _______________.

What is the answer if you put the money into the account at the beginning of the year instead of the end of the year _________.

You want $1,750,000 to upgrade your store in 15 years. The treasurer wants to make equal payments at the end of each year into a fund for the purpose of accumulating this amount. If the fund can earn an effective annual return of 8 percent, how much must the company invest at the end of each year?

The annual payment is _______________.

You borrowed $342,000 for the purchase of your new home. This loan carries an annual percentage rate of 4.9 percent. It will be paid off through equal monthly installments, including both principal and interest, over a 30-year period. What is the monthly payment required?

The monthly payment is _______________.

A credit card company runs an ad quoting a nominal interest rate of 29 percent on charges. What is the effective interest rate if interest is compounded quarterly? monthly?

The effective annual rate is ________if compounded quarterly and _______ if compounded monthly.

You plan to retire in 37 years and can invest to earn 8.5 percent. You estimate that you will need $102,000 at the end of each year for an estimated 16 years after retirement, and you expect to earn 6.5 percent during those retirement years. How much do you need to set aside at the end of each year to accumulate the money necessary for your retirement? (Assume year-end cash flows.)

I will need this much at retirement _____________and will need to set aside ___________per year (at the end of each year.

Using the no growth perpetuity formula, assume that you can receive $19,000 per year forever and that your cost of money is 8%. What is this opportunity worth today?

The opportunity is worth _______________.

Using the constant growth perpetuity formula, assume that you will receive $19,000 at the end of the first year this cash flow will grow 4% annually forever after that. With a cost of money of 9 percent, what is this opportunity worth today?

The opportunity is worth _______________.

You start a business and expect the following cash flows

Year

0

1

2

3

4

5

Cash flow

25000

45000

65000

45000

25000

How much is this series of cash flows worth today if you can earn 8% elsewhere on investments with similar risk? __________

What would this series be worth is the risk was higher and the required return is 12% instead of 8%?   _____________

B Corporation has $1000 par value bonds with 7 years left to maturity, a stated annual coupon rate of 4.5 percent (with annual interest payments).

What are these bonds worth today if the required market rate of return is 6 percent? _________

What are these bonds worth today if the required market rate of return is 5 percent? __________

What are these bonds worth today if the required market rate of return is 3 percent? __________

What is the relationship between the coupon rate, changes in the market rate and the value of these bonds?

D Corporation has three bonds outstanding. All three have a coupon rate of 7 percent and a $1000 par value. The first bond has one year left to maturity. The second bond has 4 years left to maturity. The last bond has 8 years left to maturity. Assume for simplicity that the market rate for all three bonds is now 4 percent.

What is the value for the first bond with one year left to maturity? ___________

What is the value for the second bond with four years left to maturity? ______________

What is the value for the first bond with eight years left to maturity? ___________

Assuming the same stated interest rate, in an environment of increasing interest rates which bonds will decrease in value the most -- the one with a longer term (duration/maturity) or shorter term (duration/maturity)?

H Corporation has a bond outstanding. It has a coupon rate of 8 percent and a $1000 par value. The bond has 5 years left to maturity but could be called after three years for $1000 plus a call premium of $50. The bond is selling for $1060.

The yield to maturity on this bond is __________The yield to call on this bond is _________

Solutions

Expert Solution

Solution:

There are so many questions in a question. Please ask separate question for each part. I am solving first 3 problems

Problem 1 – For a person that requires a10 percent annual return, which is better $1.00 today or $1.15 in one year?

We can solve this question by two ways either calculate the Future Value of $1 for a year and calculate the present value of $1.15 so that we can compare both the amount to take decision.

Here, Interest Rate = 10%

Future Value of $1 in one year at 10% ROI = $1 * (1+Interest Rate 0.10)1

= 1*1.10

= $1.10

Here, $1.15 is higher than $1.10 in a year, it means $1.15 in one year is better than $1 today.

Problem 2 -- Which is greater, the future value with compound interest of 4% or the future value with simple interest of 4%?

Compound Interest is always greater than simple interest.

Compound interest means the interest is accumulated every time.

Let’s take an example to understand:

Number of Years = 3

Compound Interest Value at 4% for 3 Years = (1 + 0.04)3 = 1.125

Simple Interest Value at 4% for 3 Year = 1 + (Interest Rate 0.04 x Year 3) = 1.12

Hence, the compounded interest value is greater than simple interest value.

Problem 3 -- Which is greater, when 4% interest is compounded more than once a year, or 4% per year?

Interest compounded more than once a year is greater than per year.

Example:

Lets take interest is compounded 2 times in a year (or paid half yearly)

Half Yearly Interest Rate = 4% / 2 = 2%

Number of times interest paid in a year = 2

Compound Interest Value in a year = (1 + Interest Rate 0.02)2 = 1.0404

Compound Interest value at 4% in a year = (1 + Interest Rate 0.04)1 = 1.04

Hence, 4% interest compounded more than once a year is greater than 4% per year.

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts


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