Reference no: EM133119154
Interest Rates:
1. 2 of your friends are asking you to lend them money for 1 year. One is offering to pay 4.15% weekly compounded interest rate. Another is offering 4.18% semiannually compounded rate. Which rate will you choose? The decision must maximize your return. Lending to none or both is not an option. Calculate the equivalent rate with continuous compounding:
|
|
Equivalent rate (continuously compounded)
|
|
Friend A (4.15% weekly compounding)
|
|
|
Friend B (4.18% semiannual compounding)
|
|
Which Friend will you choose?
VALUING CASH FLOWS:
2. What is the present value of Perpetuity that pays 8% on investment or $60,000 annually?
3. What is the present value of Annuity's regular cash flows, if it pays 8% on investment or $60,000 annually for the next 3 years and current interest is 6%?
BOND VALUATIONS:
4. A 2-year bond with a yield of 7% (continuous compounding) pays 6% annual coupon, paid semiannually. What is bond's price?
5. A 4-year bond with a yield of 5% (semi-annual compounding) pays 6% annual coupon, paid annually. What is bond's price?
6. Calculate Bond's price.
|
Maturity (years)
|
Zero Rate (%)
|
Cash Flow ($)
|
Present Value of Cash Flow ($)
|
|
0.5
|
5
|
3
|
|
|
1
|
5.8
|
3
|
|
|
1.5
|
6.4
|
3
|
|
|
2
|
6.8
|
103
|
|
|
Bond Price
|
|
|
|
7. Bootstrap Method: A zero-coupon bond has 9 months till maturity. If the current bond price is $96, what is the 9-month zero rate with continuous compounding?
8. Bootstrap Method: Use bootstrap method to determine Treasury zero rates:
|
Bond principal
($)
|
Time to
maturity
(years)
|
Annual coupon (paid
quarterly), ($)
|
Bond price ($)
|
Treasury Zero
rates (%)
|
|
100
|
0.25
|
0
|
99
|
|
|
100
|
0.50
|
0
|
98
|
|
STOCK VALUATIONS:
9. Based on DDM calculations, what would be the fair price of a stock that paid $4.50 in
Dividends last year, has expected future growth rate of dividends of 3% per year and the cost of equity = 8%?
TIME VALUE OF MONEY
10. You have received a job offer. The company provides you with an option to receive a $10,000 sign-in bonus at the beginning, or $11,000 at the end of the 1st year of work. Which option will you choose, if inflation has triggered the boost in interest rates to 9% with continuous compounding?
11. Q. You are marketing a subscription to your newly established Financial Newsletter. You offer an annual subscription for $500 / year, paid upfront. However, one of your prospects asked you to split it into equal quarterly payments instead. How much should be each quarterly payment, if the 1st payment will be submitted immediately and you take into consideration current 4% quarterly compounded interest rates?