Question

In: Finance

Your friend, Mike Szyslak wants be a millionaire, and he found several ways applicable. But he...

Your friend, Mike Szyslak wants be a millionaire, and he found several ways applicable. But he is still hesitating among the various options and comes to you for financial advice. Using algebra, TVM tables, financial calculator, or Excel to solve these problems, and present a report to explain the concept of Time Value of Money.

Option 4: He sets aside $50,000 into a saving account now, and will deposit $50,000 into the account at the beginning of each year for next 10 years. If the market rate is 10%, Will he become a millionaire in 10 years?

Option 5: Mike considers to buy 1,000 bonds. The bond is semi-annual coupon bond with 10-year maturity, $1,000 par value bond with a 10 percent annual coupon, and 10 percent annual required rate of return? How much does it cost now if he wants to receive all the coupon payments and par values during the 10-year period? What would be the value of the bond if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing Mike to require a 13 percent return? What would happen to the bonds' value if inflation fell, and required rate of return declined to 7 percent?

Which of the options would you recommend that Mike choose? Why?

Solutions

Expert Solution

Part A) If Mike follows option 4 then yes, he will become a millionaire:

He would receive $1,006.245.48 after 10 years.

Part B)

Cost to buy the bonds:

Therefore, to buy 1000 such bonds, total cost would be 1000 * $1,000 = $1,000,000.

==> In case the inflation rises and the required rate of return becomes 13%. The value of the bond would fall to $834.72 per bond:

==> In case the inflation goes down and the required rate of return becomes 7%. The value of the bond would go up to $1,213.19 per bond:

==> Time value of money states that it is beneficial to receive a sum of money now rather than getting the same amount of money later in the future as the recipient misses out on the opportunity cost of investing that money and earning interest.

Based on the data calculated, Mike should go with Option 4 as that way he is not blocking the entire amount in the beginning and also is eliminating the risk of fluctuation in the value of bonds due to systematic and various external factors. And option 4 would also fulfill his wish of becoming a millionaire.


Related Solutions

Waiting period.  Jamal is waiting to be a millionaire. He wants to know how long he...
Waiting period.  Jamal is waiting to be a millionaire. He wants to know how long he must wait if a. he invests ​$23,806.07 at 20​% ​today? b.he invests ​$48,435.33 at 15​% ​today? c. he invests ​$127,469.15 at 10​% ​today? d. he invests $294,279.91 at 6​% ​today?
Your friend wants to secure a desktop PC with a biometric access control. Provide several recommendations...
Your friend wants to secure a desktop PC with a biometric access control. Provide several recommendations and explain the advantages and disadvantages of each. Identify your preferred recommendation and your reasons for making that recommendation.
Your friend, Han Oh, has recently began working for an auditing firm and he wants your...
Your friend, Han Oh, has recently began working for an auditing firm and he wants your advice regarding some tests of sales transactions that he is currently undertaking with respect to one of his clients. Han selected a haphazard sample of 20 sales with a total book value of $150,000. In his sample, he found a total of $1,000 in net overstatement errors. The total sales balance per books is $40 million. Overall materiality for the engagement is $600,000. Tolerable...
Your friend, Brian, works as an Electrician working on several Commercial Buildings. He has recently finished...
Your friend, Brian, works as an Electrician working on several Commercial Buildings. He has recently finished his apprenticeship and is starting to get paying customers. He has contacted you as he knows you have been undertaking some accounting studies as part of your qualifications as he has decided to start his own Electrical Business. He wants some advice regarding his options for the structure of his new business venture, which are either a sole trader or a company. He anticipates...
A friend wants to retire in 30 years when he is 65. At age 35, he...
A friend wants to retire in 30 years when he is 65. At age 35, he can invest $500/month that earns 6% each year. But he is thinking of waiting 15 years when he is age 50, and then investing $1,500/month to catch up, earning the same 6% per year. He feels that by investing over twice as much for half as many years (15 instead of 30 years) he will have more. A. What is the future value of...
Your friend has $1000 that he wants to invest toward his retirement in about 30 years....
Your friend has $1000 that he wants to invest toward his retirement in about 30 years. This will be his first ever investment. What is the best choice? A hedge fund A Treasury bill A mutual fund Two shares of Apple stock, which has a price of $500 per share In 1980, a stock with the ticker symbol "MBA" would trade on which exchange, the New York Stock Exchange (NYSE) or Nasdaq? How about in 2014? 1980 = NYSE or...
Your friend John has never learned Economics. He wants to know the differences between a change...
Your friend John has never learned Economics. He wants to know the differences between a change in the quantity demanded and a change in demand. He also wants to know the differences between a change in the quantity supplied and a change in supply. a) Explain to John the differences between a change in the quantity demanded and a change in demand. b) Explain to John the differences between a change in the quantity supplied and a change in supply.
A friend wants to borrow money from you. He states that he will pay you $3,300...
A friend wants to borrow money from you. He states that he will pay you $3,300 every 6 months for 8 years with the first payment exactly 6 years and 6 months from today. The interest rate is 5.6 percent compounded semiannually. What is the value of the payments today? A) $30,219.57 B) $31,226.89 C) $30,354.43 D) $29,396.47 E) $31,447.66
So your best friend wants to start a small business selling frozen yogurt. He needs $10,000...
So your best friend wants to start a small business selling frozen yogurt. He needs $10,000 to help him get some equipment for his production. He asks you to help him out. You want to participate in this venture. What are the different ways or forms of business he can structure the relationship to deal with financing, tax and liability issues? What are the specific effects of the different ways to organize your business for tax, liability and future growth?...
Teenager Mike wants to borrow the car. He can ask either parent for permission to take...
Teenager Mike wants to borrow the car. He can ask either parent for permission to take the car. If he asks his mom, there is a 20% chance she will say ”yes,” a 30% chance she will say ”no,” and a 50% chance she will say, ”ask your father.” Similarly, that chances of hearing ”yes”/”no”/”ask your mother” from his dad are 0.1, 0.2, and 0.7 respectively. Imagine Mike’s efforts can be modeled as a Markov chain with state (1) talk...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT