Question

1) Identify three situations in which accounting measures are based upon present values....please explain

2) Mary will be making an investment of $5000 per year for 5 years The investment will be made at the beginning of each year. The interest is 9% compounded quarterly

How much will she have at the end of the 5 years?

3) What's the difference between the effective yield and the stated rate of interest. Which one of these would be higher....please explain.

4) What would you pay for a $100.000 bond that will mature in 15 years and pays $5000 a year in interest. The interest rate on the bond is 5 %. Please don't just give an answer but explain.

Answer 1

1.

Because of the time value of money, money received or paid out today is worth more than the same amount of money will be in the future. That's because the money can be invested and allowed to grow over time.

The formula for the future value of an ordinary annuity is as follows. (An ordinary annuity cash flow occur at the end of a particular period, rather than at the beginning, as is the case with an annuity due.)

P = 5000

r = 9% divided by 4 = 2.25% ( because compounding quaterly) = 2.25/100 =0.0225

n = 20 ( because in 1 year there is 4 quater. so in 5 year number of period will be 20)

FV OF ANNUITY = 5000[ / 0.0225

= 5000*69.356 = 346780

FV OF ANNUITY DUE = (1+r) * FV OF ANNUITY REGURAL

= (1+0.0225)* 346780 =354582

2.EFFECTIVE INTEREST RATE =(1+0.09/4)⁴-1 =(1.0225)⁴-1 =9.308%

3.The yield-to-maturity (YTM) is the rate of return earned on a bond that is held until maturity. To compare the effective yield to the yield-to-maturity (YTM), convert the YTM to an effective annual yield. If the YTM is greater than the bond’s effective yield, then the bond is trading at a discount to par. On the other hand, if the YTM is less than the effective yield

4. total investment in bond = 100000

   future value of bond after 15 year = total investment (1-r )¹⁵ =100000*(1-0.05)¹⁵

   =100000*2.07892

=207893