Reference no: EM132985011

Questions - Financial Management Application of Time Value of Money

Answer all questions. You are a financial analyst at a prominent financial institution. Your clients have different investment concerns and requires your advice in the following questions.

Q1. Mr. Grange is saving $225,000 per year in a savings account that is paying annual compound interest of 5%. He intends to continue this for three years after which he will move it to NCB's long-term fund which pays interest of 8% per annum compounded semi-annually

i. How much would he be able to transfer to NCB after 3 years?

ii. How much money will he have at the end of 7 years from today?

Q2. A financial institution is offering a five-year term deposit that will pay 9% per annum compounded quarterly. If $250,000 was invested in this term deposits,

a. How much money will you have at the end of four years?

b. What is the EAR?

Q3. Kenisha would like to receive equal instalment of $500,000 at the beginning of each year for the next 12 years. How much should she have in an investment account that pays 8% per annum in order to achieve this goal?

Q4. Janice would like to receive $15,820 each year for the next 5 years (first payment at the end of year 1). Then she hopes to receive $28,250 per year (starting at the end of year 6) for an additional 5 years. In total 10 payments. Assume an interest rate of 6%.

i. Find the present value of this cash flow stream.

ii. Find the future value of this cash flow stream.

Q5. Suppose you presently have $25,000 invested at JMMB, at a rate of 8% per annum, approximately how many years will it take for the investment to triple?

Q6. Paul Grant wishes to accumulate $980,000 at the end of four years so that he may make a down payment on a house which will cost $10,250,000.

a. What should his equal end of year deposit be to accumulate $980,000 at 3% rate of interest?

b. If the young man receives the remaining portion of the cost of the house from a financial institution at a rate of interest of 9% to be repaid monthly over 14 years, calculate the monthly payment for this loan.

Q7. If you wish to save $1,500,000 in four years, how much would you need to deposit at the start of each quarter to achieve this goal assuming an interest rate of 6% compounded quarterly?

Q8. What is the present value of an annual annuity payment of $15,000 made for 11 years with a discount rate of 7% and with the first payment starting today?

Q9. You expect to deposit the following cash flows at the end of years 1 through 5, $15,000, $12,000, $19,000, $23,000 and $18,000 respectively. What is the future account value at the end of year 8 if you can earn 9% compounded annually?

Q10. Assume that you can get a loan from NCB for $264,500 for three years to buy an item of your choosing. The loan must be repaid in 36 equal monthly payments. The annual interest rate on the loan is 12 percent of the unpaid balance. How large are the monthly payments?

Q11. A friend of yours is interested in purchasing a motor vehicle with at a cost of $3.5 million. The bank has indicated that they are willing to finance 80% of the purchase price at a rate of 12% p.a. over 4 ½ years with equal monthly repayments. Your friend has asked you to

a. Compute the required monthly payments. (round to the nearest dollar)

b. Prepare the Loan amortization schedule for the first 4 months (round to the nearest dollar).

c. Determine how much would be required to close the loan after 2 ½ years.

Q12. Determine the current value of an 8% GOJ bonds with a face value of $800,000.00 that pays interest semi-annually (tax free) and matures in exactly 3 years. The required return on this security is 10% p.a.

Q13. Forrest Co. issued 11-year bonds 1 year ago at a coupon rate of 8.5%. The bond makes semi-annual payments. If the required rate of return of an investor on these bonds is 6%, what will the bond sell for today?

Q14. JMMB issued 10-year bonds with a coupon rate of 8%. The bond makes semiannual payments. If these bonds currently sell for 87 percent of par value. What is the YTM?

Q15. John Brown is interesting in investing in stocks. Please assist him in calculating the following:

a. The Jamaica Stock Exchange has reported at the end of today's trading, the stock price of CPJ is $50. Investors require a ten percent rate of return on stocks of a similar nature. If the company's next dividend is $3.50, what growth rate is expected for CPJ?

b. GraceKennedy issued 8 % - $300 000 preference shares at par 9 years ago. These shares are now valued $395 000. What are the investors required rate of return for these preference shares?

c. John Brown is contemplating the purchase of BNS ordinary shares at the beginning of the year. The dividend is expected to be $2.20 and the market price at the end of the year is projected to be $50. If the investors' required rate of return is 20%, what is the value of the security?