Question

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. Answer the given questions.

Answer the given questions.

Question 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.

Question 2. Suppose that, on January 1, you deposit $100 in an account that pays a nominal (or quoted) interest rate of 8.125%, 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 3 and 4:
A firm issues a 10-year, $1,000 par value bond. The required rate of return is 10%.

Question 3. What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $878.00? Another bond that sells for $1,134.20? What does a bond selling at a discount or at a premium tell you about the relationship between r_d and the bond’s coupon rate?

Question 4. What are the total return, the current yield, and the capital gains yield for the discount bond in Question 3 at $878.00? At $1,134.20? (Assume the bond is held to maturity and the company does not default on the bond.)

PLEASE ANSWER QUESTION #2

Answer 1

Question 2. Suppose that, on January 1, you deposit $100 in an account that pays a nominal (or quoted) interest rate of 8.125%, with interest added (compounded) daily. How much will you have in your account on October 1, or 9 months later?

Future value of deposit = Investment * [(1 + (Interest rate / 365))^365] * days/365

Number of days between 1st January to 1st October = 273

effective annual interest rate = (1 + (Interest rate / 365))^365 - 1

effective annual interest rate = (1 + (8.125% / 365))^365 - 1

effective annual interest rate = (1 + 0.0002226)^365 - 1

effective annual interest rate = 1.0846322 - 1

effective annual interest rate = 8.46%

Future value of deposit = Investment * (1 + (Interest rate * 273 / 365))

Future value of deposit = 100 * (1 + (8.46%% / 365))

Future value of deposit = 100 * (1 + 0.06330)

Future value of deposit = $106.33