# Project #211323 - Financial Management

 Subject Business Due By (Pacific Time) 11/11/2017 07:00 pm

Q2. Comment on the following quote:

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”           â€• Albert Einstein

Q3. Compounding

Your parents have discovered a \$1000 bond at the bottom of their safe-deposit box. The bond was given to you by your late great-aunt Hilda on your second birthday. The bond pays interest at a rate of 5% per annum, compounded annually. Interest accumulates and is paid at the time the bond is redeemed. You are now 27 years old. What is the current worth of the bond (principal plus interest)?

Using excel:     FV(rate = ?, nper = ?, pmt = 0, pv = ?, type = 0) = ?

Q4. Discounting

Determine the present value, discounted at 6 percent per year of \$50,000 to be received five years from today if the interest rate is compounded:

1. Semiannually

2. Quarterly

Excel Hint:

1. PV(rate = ?, nper = ?, pmt = 0, fv = ?, type = 0) = ?

2. Rate = (Annual percentage rate) / (number of payments per year)

Q5. Financial planning

Carol Jenkins, a lottery winner, will receive the following payments over the next seven years. If she can invest her cash flow in a fund that will earn 10.5% annually, what is the present value of her winning.

 discount rate = 10.50% info cash flow # of year for discounting discounted cash flow 0 1 200000 ?? ?? 2 250000 ?? ?? 3 275000 ?? ?? 4 300000 ?? ?? 5 350000 ?? ?? 6 400000 ?? ?? 7 550000 ?? ?? present value = sum of all discounted cash flow ??

Q6. Annuity and mortgage payment

Prepare an amortization schedule for a three-year loan of \$75,000. The interest rate is 8% per year, and the loan calls for equal annual payment.

• How much interest is paid in the third year?

• How much total interest is paid over the life of the loan? (Hint, see the example in slide).

Hint:

1. Fixed total payment per year = PMT(rate = ?, nper = ?, pv = ??, fv = 0, type = 0)

2. Interest expense = beginning principal * interest rate

3. Fixed total payment = interest expense + principal payment

4. Ending principal = beginning principal – principal payment

Q7: Uneven cash flow

James Street’s son, Harold, is 10 years old today. Harold, a studious young fellow, is already making plans to go to college on his 18th birthday, and his father wants to start putting money away now for that purpose. Street estimates that Harold will need \$18,000, \$19,000, \$20,000 and #21,000 for his freshman, sophomore, junior, and senior years, respectively. He plans on making these amounts available to Harold at the beginning of each of these years.

Street would like to make eight annual deposits (the first of which would be made on Harold’s 11th birthday, one year from now, and the last on his 18th birthday, the day he leaves for college) in an account earning 10 percent annually. He wants the account to eventually be worth enough to just pay for Harold’s college expense. Any balance remaining in the account will continue to earn the 10 percent.

How much will Street have to deposit in this “planning” account each year to provide for Harold’s education? Hints: Calculate the present value of all the year-end needs. The 8-year deposit (year-end payment) is an annuity. The present value of the annuity should equal to the present value of the college expenses.

The present value of year-end needs (Y) = ?

Hint: the sum of the present value for each piece of withdraw.

The year-end payment (x) = ?

Hint: with the result of (Y) from previous step, you can transform the questions into an annuity problem, with Y as the present value of the annuity of x’s

Q7: Pricing and regular and callable bond

Dooley, Inc., has outstanding \$100 million bonds that pay an annual coupon rate of interest of 11 percent. Par value of each bond is \$1,000. The bonds are scheduled to mature in 10 years. Because of Dooley’s increased risk, investors now require a 13 percent rate of return on bonds of similar quality with 10 years remaining until maturity. The bonds are callable at 110 percent of par at the end of 10 years.

1. What price would the bonds sell for assuming investors do not expect them to be called?

2. What price would the bonds sell for assuming investors expected them to be called at the end of 10 years?

Hint: you can use the following template for the solution.

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