Submitted By mlundblad

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Words 375

Pages 2

1. Seven years ago your firm issued $1,000 par value bonds paying a 7% semi-annual coupon with 15 years to maturity. The bonds were originally issued at par value.

a. What was the original yield to maturity on the bonds? They were issued at par…so the YTM = Coupon rate: 7%

b. If the current price of the bonds is $875, what is the yield to maturity of the bonds TODAY?

1000 FV

.07(1000)÷2= PMT

(15-7)*2 = N

-875 PV I/Y = 4.623*2 = 9.25%

c. If the yield to maturity computed in part b remains constant, what will be the price of the bonds three years from today?

Leave everything the same, just change N to (8 – 3)*2 = 10

PV = $911.70 2. You are looking to invest some money and identify two $1,000 par bonds with the same risk, both with 12 years to maturity and paying semi-annual coupons. Each of the bonds has a required return of 7%, but one bond is priced at $839.42 and the other at $1,120.44.

Compute the annual coupon rates for each bond.

1000 FV Only difference is price for second one

12*2 N -1120.44 PV

3.5 I/Y

-839.42 PV PMT = 42.5*2 = 85

PMT = 25*2 = 50 C. Rate = 85/1000 = .085 = 8.5%

C . Rate = 50/1000 = .05 = 5%

3. A $1,000 par bond has a 5% semi-annual coupon and 12 years to maturity. Bonds of similar risk are currently yielding 6.5%.

a. What should be the current price of the bond?

1000 FV

.05(1000)÷2= PMT

12*2 = N

6.5/2 = I/Y PV = $876.34

b. If the bond’s price five years from now is $1,105, what would be the yield to maturity for the bond at that time?

Just change N again, to…(12-5)*2 = N -1105 PV I/Y = 1.634*2 = 3.31%

c. What will the price of this bond be 1 year prior to maturity if its yield to maturity is the same as that computed in part b?

Just change N = 1*2….PV =…...

...Gregory Cayo Time value of money & inventing Davenport University/ Finc 510 Time Value of money plays a major role in our lives. Whether you are an investor or a worker, somehow you still have to deal with it. As an investor, when starting an investment with a present value, the future value would eventually make profit in the next year or so. In other words, compounding is the name given to a starting investment that generates interest. Additionally, many jobs have 401(k), which allow workers to save and invest their money after their retirement. Some companies are already stockholders. Therefore, workers can be asked to work beyond their retirement deadline when there is a crash in the market. As a result, workers might no longer benefit from their 401 (k) saving. However, they would rather be part of the government retirement plan, which offer a lot lower than the 401(k) retirement plan (Ehrhard & Brigham, 2011). Financial problems are being solved easier when using spreadsheets on excel. The use of spreadsheets provides a visual concept of time value of money including all the transactions that are made by a company. By using spreadsheets, all the calculations are being made using a specific formula respectively. It is also helpful to use a time line when solving finance problems. Whether the problem involves excel or not, a time line is usually required to set up all the formula needed. A Time line tends to simplify the amount of work in a much simpler......

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...The Time Value of Money 1 LASA 1 The Time Value of Money Carla E. Holbrook Argosy University 20 September 2013 The Time Value of Money 2 Abstract This analysis is an exercise that examines the problem of a woman who has been working for 25 years and is now approaching retirement. During this exercise I will be required to calculate the following things and give an analysis of what the answer means. a. Calculate compound interest to evaluate the value of her savings account after 20 years of deposits. b. Calculate the bonus payout over 20 years vs a one time payment with interest and distinguish which bonus option would be better for the client. c. Calculate the present value of the bonus and analyze the difference in bonus for the client. d. Analyze the tuition cost for the cline and determine what the future cost will be and determine how these funds can be accumulated over time. The Time Value of Money 3 The Time Value of Money Mary has been working for a university for almost 25 years and is now approaching retirement. She wants to address several financial issues before her retirement and has asked you to help her resolve the situations below. Issue A: For the last 19 years, Mary has been depositing $500 in her savings account , which has earned 5%......

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...Time Value of Money Extra Problem Set 1 1. You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to draw out of your savings at the rate of $10,000 per year. How much would you have to pay in equal annual deposits until retirement to meet your objectives? Assume interest remains at 9%. [$1254] 2. You can deposit $4000 per year into an account that pays 12% interest. If you deposit such amounts for 15 years and start drawing money out of the account in equal annual installments, how much could you draw out each year for 20 years? [$19964.12] 3. What is the value of a $100 perpetuity if interest is 7%? [$1428.57] 4. You deposit $13,000 at the beginning of every year for 10 years. If interest is being paid at 8%, how much will you have in 10 years? [$203391.33] 5. You are getting payments of $8000 at the beginning of every year and they are to last another five years. At 6%, what is the value of this annuity? [35720.84] 6. How much would you have to deposit today to have $10,000 in five years at 6% interest compounded semiannually? [$7440.94] 7. Construct an amortization schedule for a 3-year loan of $20,000 if interest is 9%. 8. If you get payments of $15,000 per year for the next ten years and interest is 4%, how much would that stream of income be worth in present value terms? [$121663.50] 9. Your company must deposit equal annual beginning of year payments into a...

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...Time Value of Money Exercises 1. What is the balance in an investment account at the end of 10 years if $5,000 is invested today and the account earns 8% interest compounded annually? What would the value be after 50 years? After 100 years? 2. What is the present value of the following future amounts: Future Value Discount rate Number of periods $15,000 6% 5 $37,000 9% 10 $596,000 11% 4 $1,178,000 9.5% 12 3. Calculate the present value of the following cash inflows assuming an 11% discount rate. Year Cash flow 1 17,000 2 17,000 3 17,000 4 17,000 5 17,000 6 100,000 4. Consider the following two mutually exclusive projects Year Cash Flow Project 1 Cash Flow Project 2 0 -150,000 -150,000 1 $40,000 $100,000 2 $90,000 $80,000 3 $120,000 $60,000 a) Calculate the net present value (NPV) of each project assuming an 8% discount rate. b) Calculate the Internal Rate of Return (IRR) for each project. 5. Anne Jones checked her lottery ticket once again. The numbers matched; she had won the $10,000,000 grand prize. The lottery provided two options for payment of the grand prize. First, the winner could take $1,000,000 immediately, with the remainder payable in $1,000,000 instalments over nine years, starting one year from now. The alternative payment option was an immediate lump sum payment of $7,000,000. ...

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...Fundamentals of Financial Math FIN-3331-XTIB 14/T3 (Dodd) Test Quiz Chapter 5 Started 1/27/14 11:28 PM Submitted 1/27/14 11:35 PM Due Date 2/2/14 11:59 PM Status Completed Attempt Score 4.99995 out of 4.99995 points Time Elapsed 6 minutes out of 45 minutes Instructions • Question 1 0.33333 out of 0.33333 points Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%? Selected Answer: 19.56% Answers: 18.58% 19.56% 20.54% 21.57% 22.65% Response Feedback: APR = Nominal rate 18.00% Periods/yr 12 EFF% = (1 + (rNOM/N))N 1 = 19.56% • Question 2 0.33333 out of 0.33333 points You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now? Selected Answer: $16,908 Answers: $15,260 $16,063 $16,908 $17,754 $18,642 Response Feedback: N 2 I/YR 6.2% PV $0.00 PMT $8,200 FV $16,908 • Question 3 0.33333 out of 0.33333 points Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. Selected Answer: True Answers: True False • Question 4 0.33333 out of 0.33333......

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...Time Value of Money: Name: Professor’s Name: Institution: Course Title: Date: Introduction Time Value of Money is the concept that a certain amount of money has a different value today than it would in the future. It is explained as the idea that money at hand at the present time is worth much more than the equal amount would in future (Crosson, 2008). If you lend your friend money today, most likely he will refund the same amount you lend him in future. That money will have added no value to itself. Lending it to your friend is not an investment. The sooner you get the money back, the better because you can invest it elsewhere. Therefore, if one was not to use a given amount of money today, with intentions of using it in the future, he should put that money in a saving account. That way, the money will accrue interest and it will not be of the same amount as initially saved. The amount of interest accrued on saved money depends on three things: the initial amount saved, the bank interest rate and the span of time the money will be saved. Inflation is another factor to be considered when calculating the interest to be accrued. If the inflation is high, the interest reduces since the ‘value’ of money reduces (Carr, 2006). This paper will discuss this concept of time value of money with the help of a question problem. Assuming I am 30 years old plans and I plan to accumulate $1 million by my retirement date, which is 30 years from......

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...12/9/2012 Chapter 9 The Time Value of Money 1 Chapter 9- Learning Objectives Identify various types of cash flow patterns (streams) that are observed in business. Compute (a) the future values and (b) the present values of different cash flow streams, and explain the results. Compute (a) the return (interest rate) on an investment (loan) and (b) how long it takes to reach a financial goal. Explain the difference between the Annual Percentage Rate (APR) and the Effective Annual Rate (EAR), and explain when each is more appropriate to use. Describe an amortized loan, and compute (a) amortized loan payments and (b) the balance (amount owed) on an amortized loan at a specific point during its life. Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 1 12/9/2012 Time Value of Money The principles and computations used to revalue cash payoffs at different times so they are stated in dollars of the same time period The most important concept in finance used in nearly every financial decision Business decisions Personal finance decisions Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Cash Flow Patterns Lump-sum amount – a......

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...MBA/MFM 253 TVM Practice Problems 2 Fall 2011 1. You are considering buying a new car. The current price of the car is $25,000. The dealer has offered you a special nominal interest rate of 3% each year for the next 3 years if you finance through the dealership. a) What is your monthly car payment? PV = 25,000 I = 0.25 N = 36 FV = 0 PMT =? = $727.03 25,000 = PMT (1-(1/(1.0025)36))/.0025 b) You are considering putting a $5,000 down payment on the car, what would your payment be if you did this assuming you could still get the special interest rate? $581.62 c) In either case what is the effective rate of interest you paid on the car? 1.002512=1.030416 3.0416% 2. A given rate is quoted at an effective annual rate of 12.55%. If you know that the interest compounds quarterly, what is the nominal annual rate? 12% Need to find the rate that when compounded four periods will equal .1255 solve for r in the following equation (1+(r/4))4=1.125 3. What is the PV of an annuity that pays 10,000 a year at the end of each of the next 15 years assuming a 5% return? $103,796.58PMT = 10,000 N=15 I = 5 FV = ) PV = ? What is the PV of an annuity that pays 10,000 a year at the beginning of each of the next 12 years assuming a rate of 7%? $84,986.743 3. PV and FV problems that are a little harder ( you need to figure out the pieces, the final answers are there – but you need to figure out how it set it up – the set up is usually the trickier part and the...

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...Assignment 2: LASA 1—The Time Value of Money By Wednesday, February 12, 2014 submit a 4-5 page report based on the following problem: Mary has been working for a university for almost 25 years and is now approaching retirement. She wants to address several financial issues before her retirement and has asked you to help her resolve the situations below. Her assignment to you is to provide a 4-5 page report, addressing each of the following issues separately. You are to show all your calculations and provide a detailed explanation for each issue. Issue A: For the last 19 years, Mary has been depositing $500 in her savings account , which has earned 5% per year, compounded annually and is expected to continue paying that amount. Mary will make one more $500 deposit one year from today. If Mary closes the account right after she makes the last deposit, how much will this account be worth at that time? Issue B: Mary has been working at the university for 25 years, with an excellent record of service. As a result, the board wants to reward her with a bonus to her retirement package. They are offering her $75,000 a year for 20 years, starting one year from her retirement date and each year for 19 years after that date. Mary would prefer a one-time payment the day after she retires. What would this amount be if the appropriate interest rate is 7%? Issue C: Mary’s replacement is unexpectedly hired away by another school, and Mary is asked to stay in her position for......

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...Assignment 2: LASA 1—The Time Value of Money By Wednesday, July 29, 2015 submit a 4-5 page report based on the following problem: Mary has been working for a university for almost 25 years and is now approaching retirement. She wants to address several financial issues before her retirement and has asked you to help her resolve the situations below. Her assignment to you is to provide a 4-5 page report, addressing each of the following issues separately. You are to show all your calculations and provide a detailed explanation for each issue. Issue A: For the last 19 years, Mary has been depositing $500 in her savings account , which has earned 5% per year, compounded annually and is expected to continue paying that amount. Mary will make one more $500 deposit one year from today. If Mary closes the account right after she makes the last deposit, how much will this account be worth at that time? Issue B: Mary has been working at the university for 25 years, with an excellent record of service. As a result, the board wants to reward her with a bonus to her retirement package. They are offering her $75,000 a year for 20 years, starting one year from her retirement date and each year for 19 years after that date. Mary would prefer a one-time payment the day after she retires. What would this amount be if the appropriate interest rate is 7%? Issue C: Mary’s replacement is unexpectedly hired away by another school, and Mary is asked to stay in her position for another......

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...Time Value of Money Terminology Terminology (AKA jargon) can be a major impediment to understanding the concepts of finance. Fortunately, the vocabulary of time value of money concepts is pretty straightforward. Here are the basic definitions that you will need to understand to get started (calculator key abbreviations are in parentheses where appropriate): Banker's Year A banker's year is 12 months, each of which contains 30 days. Therefore, there are 360 (not 365) days in a banker's year. This is a convention that goes back to the days when "calculator" and "computer" were job descriptions instead of electronic devices. Using 360 days for a year made calculations easier to do. This convention is still used today in some calculations such as the Bank Discount Rate that is used for discount (money market) securities. Compound Interest This refers to the situation where, in future periods, interest is earned not only on the original principal amount, but also on the previously earned interest. This is a very powerful concept that means money can grow at an exponential rate. Compounding Frequency This refers to how often interest is credited to the account. Once interest is credited it becomes, in effect, principal. Note that the compounding frequency and the frequency of cash flows are not always the same. In that case, the interest rate is typically adjusted to an effective rate that is of the same periodicity as the cash flows. For example, if we have quarterly cash......

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...question by using a math formula and also by using the Excel function wizard. Inputs: Formula: Wizard (FV): PV = I/YR = N = FV = PV(1+I)^N = 1000 10% 5 $ 1,610.51 $1,610.51 Note: When you use the wizard and fill in the menu items, the result is the formula you see on the formula line if you click on cell E12. Put the pointer on E12 and then click the function wizard (fx) to see the completed menu. Also, it is generally easiest to fill in the wizard menus by clicking on one of the menu slots to activate the cursor and then clicking on the cell where the item is given. Then, hit the tab key to move down to the next menu slot to continue filling out the dialog box. Experiment by changing the input values to see how quickly the output values change. b. Now create a table that shows the FV at 0%, 5%, and 20% for 0, 1, 2, 3, 4, and 5 years. Then create a graph with years on the horizontal axis and FV on the vertical axis to display your results. Begin by typing in the row and column labels as shown below. We could fill in the table by inserting formulas in all the cells, but a better way is to use an Excel data table Note that the Row Input Cell is D9 and the Column Input Cell is D10, and we set Cell B32 equal to Cell E11. Then, we selected (highlighted) the range B32:E38, then clicked Data, Table, and filled in the menu items to complete the table. Years (D10): $ 1,610.51 0 1 2 3 4 5 Interest Rate......

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...Time value of money is the concept that shows the value of money which decreases day by day. There are so many factors which contribute to the time value of money such as inflation and increasing interest rates. The time value of money is sued to solve the problems which are related to the loans, mortgage, leases, saving and annuities. In the investment, time value of money is used to compare the alternatives of investment (Weil, 1990). The time value of money is based on the concept that money that anyone has today is worth more than the expectation which one will receive in the future. The money which is hold in the present is worth more because it can be invested and can earn the interest. For example, one can invest the dollar for one year at a 6% annual interest rate and accrue &1.06 at the end of the year. Then it can be said that the future value of the dollar is $1.06 given an interest rate and the present value of the $1.06 it is expected to receive in one year is only $1 (Drake, & Fabozzi, 2009). Interest rates and series of payments are included in the transactions. If the time value money is not used in past then there may be risk in the transaction. This helps in reaching at the comparable value of the money. that anyone has today is worth more than the expectation which one will receive in the future. The money which is hold in the present is worth more because it can be invested and can earn the interest. For example, one can invest the dollar......

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...CHAPTER 5 TIME VALUE OF MONEY (Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines. Multiple Choice: True/False (5-2) Compounding F J Answer: a EASY [i]. Starting to invest early for retirement increases the benefits of compound interest. a. True b. False (5-2) Compounding F J Answer: b EASY [ii]. Starting to invest early for retirement reduces the benefits of compound interest. a. True b. False (5-2) Compounding F J Answer: a EASY [iii]. A time line is meaningful even if all cash flows do not occur annually. a. True b. False (5-2) Compounding F J Answer: b EASY [iv]. A time line is not meaningful unless all cash flows occur annually. a. True b. False (5-2) Compounding F J Answer: a EASY [v]. Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly. a. True b. False (5-2) Compounding F J Answer: b EASY [vi]. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. a. True b. False (5-2) Compounding F J Answer: a EASY [vii]. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. a. True ......

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...Time Value of Money Managerial Finance II/FIN476 October 21, 2007 Time Value of Money The Time Value of Money (TVM) serves as a foundation for all other notions in finance. It influences business finance, consumer finance and government finance. Time Value of Money (TVM) results from the concept of interest. Time Value of Money (TVM) is an important concept within the financial management. It compares investment alternatives and then to solve problems, which involving loans, mortgages, leases, savings, and annuities. “In determining the future value, we measure the value of an amount that is allowed to grow at a given interest rate over a period of time” (Block & Hirt 2005). “Why would any rational person defer payment into the future when he or she could have the same amount of money now? For most of us, taking the money in the present is just plain instinctual. So at the most basic level, the time value of money demonstrates that, all things being equal, it is better to have money now rather than later” (Croome 2003). The concept of Time Value of Money (TVM) is that the dollar that company has today is worth more than the promise or expectation that the company will receive a dollar in the future. Money, which a company holds today, is worth more because the company can then invest it and earn interest. Therefore, a company should receive some compensation for foregoing spending. For instance, a company can invest their dollar for one year......

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