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Assignment 1 TVM, Bonds Stock

This document contains 12 questions related to finance topics such as bonds, stocks, interest rates, and time value of money. The questions ask the reader to calculate values like bond prices, expected rates of return, stock prices, and cash flows under different scenarios. They require applying concepts like compound interest, present value, dividend growth rates, and non-constant growth to arrive at the answers.

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Muhammad Ali Samar
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86 views

Assignment 1 TVM, Bonds Stock

This document contains 12 questions related to finance topics such as bonds, stocks, interest rates, and time value of money. The questions ask the reader to calculate values like bond prices, expected rates of return, stock prices, and cash flows under different scenarios. They require applying concepts like compound interest, present value, dividend growth rates, and non-constant growth to arrive at the answers.

Uploaded by

Muhammad Ali Samar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Course: SFA&D

Assignment # 01

1) If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly
payments, what is the quoted/simple interest rate?

2) Universal Bank pays 7 percent interest, compounded annually, on time deposits. Regional Bank
pays 6 percent interest, compounded quarterly. Based on effective interest rates, in which
bank would you prefer to deposit your money?

3) Mr A has decided to start saving for his retirement. Beginning on his twenty-first birthday, Mr.
A plans to invest Rs.2,000 each birthday into a savings investment earning a 7 percent
compound annual rate of interest. He will continue this savings program for a total of 10 years
and then stop making payments. But his savings will continue to compound at 7 percent for 35
more years, until Mr A retires at age 65. Ms. B also plans to invest Rs.2,000 a year, on each
birthday, at 7 percent, and will do so for a total of 35 years. However, she will not begin her
contributions until her thirty-first birthday. How much will Mr. A and Ms. B savings programs be
worth at the retirement age of 65? Who is better off financially at retirement, and by how
much?

4) Mr A is a friend of yours. He has plenty of money but little financial sense. He received a gift of
$12,000 for his recent graduation and is looking for a bank in which to deposits the funds.
Partner’s saving bank offers an account with an annual interest rate of 3 percent compounded
semi-annually while selwyn’s bank offers an account with a 2.75 percent annual interest rate
compounded quarterly. Calculate the value of the two accounts at the end of one year and
recommend to Mr A which account he should choose?

5) Your brother has just graduated from high school and is seeking your advice as to whether he
should find a job immediately or go to college for four years and then find a job. He estimates
that if he gets a job immediately, he will earn $15,000 per year for the next 40 years. If he goes
to college first, he estimated that he can earn $30,000 for each of the 36 years after he gets
out. (Whether he goes to college or not, he plans to retire 40 years from today.) Assume that
his time value of money is 14% and that all cash flows are ordinary annuities. (If he goes to
college first, he can borrow money at 14% too)

a) What will be the present value of his cash flows if he gets a job immediately?
b) What will be the present value of his cash flows if he goes to college first?
c) What should he do?
Topic: Bonds

6) Sun co.’s bonds, maturing in 7 years, pay 8% interest on a $1,000 face value. However, interest
is paid semi-annually. If your required rate of return is 10%, what is the value of the bond?
How would your answer change if the interest were paid annually?

7) Sharp Co. bonds are selling in the market for $1,045. These 15 year bonds pay 7% interest
annually on a $1,000 par value. If they are purchased at the market price, what is the expected
rate of return?

8) You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15
years. Your required rate of return is 10 percent.

1. Calculate the value of the bond.

2. Calculate YTM

Topic: Stocks

9) ABC Ltd paid a dividend of Rs 4 per share at the end of the year. It is expected to grow by 8
percent each year for the next 4 years. The market price of the shares is expected to be Rs 60
at the end of 4 years. Assuming 12 percent required rate of return of investors, at what price
should the shares of ABC Ltd sell?

10) Blackburn and Smith common stock currently sells for $23 per share. The company’s
executives anticipate a constant growth rate of 10.5 percent and an end-of-year dividend of
$2.50.What is your expected rate of return? If you require a 17% return, should you purchase
the stock

11) BMM industries pays a dividend of $ 2 per quarter, the dividend yield on its stock is reported at
4.8%. What price is the stock selling at?

12) Nonconstant Growth. Tattletale News Corp. has been growing at a rate of 20 percent per year,
and you expect this growth rate in earnings and dividends to continue for another 3 years.

a. If the last dividend paid was $2, what will the next dividend be?
b. If the discount rate is 15 percent and the steady growth rate after 3 years is 4 percent, what
should the stock price be today?

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