(1) Why is time value of money a fundamental principle in finance? Explain its importance. (5 points)
(2) A company has offered to pay $3000 per year for 15 years, at an interest rate of 8%. What is the present value of the cash-flow? (4 points)
(3) A company offers to invest 13000 for 10 years at a 3%. What will be in the account 10 years from now? (4 points)
(4) You want to have $75,000 in your savings account 15 years from now and you would like to make equal deposits each year into the account. If the account earns 8% interest and the first deposit is today, how much must you deposit? (4 points)
(5) If you want to be a millionaire when you retire in 50 years, how much must you save each month if you can earn a 6% annual rate of return? (4 points)
(6) XYZ Corporation has 8% coupon bonds with 5 years to maturity. The bonds have a YTM of 5%. What is their current market price and current yield? Assume interest is paid semi-annually. (10 points)
(7) Refer to question 6. If interest rates suddenly rise by 3%, what will happen to the price and current yield of the bond? (3 points) (Compute the new price and current yield) What does this tell you about interest rate risk? (7 points)
(8) Soggy Donuts has just announced that it will pay a $4 dividend for each of the next 4 years, a $3 dividend for two years after that and then stop dividends altogether. If the company’s required return is 10% what is the stock worth? (7 points)
(9) Picky Preferred stock will pay a cash dividend of $20 per year forever. If the company has a required return of 15%, what is the stock worth? (3 points)
(10) Variable Dividend Stock is expected to pay dividends of $2, $,2, $,3, $4, and $4 over the next five years. After that the dividend is expected to grow at a constant rate of 4%. If the return on the stock is 9%, what is the price? (7 points)
(11) If Stock A has an expected dividend of $3.00, a growth rate of 3%, and a return of 7%,
a. what is its current price? (2 points)
b. What would stock A’s price be one year from now? (2 points)
c. Show that stock A’s dividend yield is 4% and its capital gain yield is 3% (3 points)
(12) (10 points) A friend is planning to purchase a new car for $35,000 and intends to borrow money to finance the entire purchase. She has asked you to compare the following options and to let her know which one you think is best:
Option I: $5000 price reduction, plus a four-year loan, with monthly payments. The annual interest rate on the loan will be 5%.
Option II: A zero interest loan, with a 4-year term and monthly payments.
(13) (10 points) An investor plans to borrow $20,000. The loan will be repaid in 5 annual payments. The interest rate charged is 7%. Find the loan payment and amortize the loan.
(14) (15 points) Please base your answer to the following questions on the information below:
Assume that the bond has 5 semi-annual periods remaining until maturity. (i.e. you are 2 ½ years away from March 2009).
(1) Find the value of the bond using the YTM shown as the required return; the bond’s price should be approximately 103.75 (assume that the Bond has a face value of $100.) Explain why it is selling a premium
(2) Assume that nothing about the bond or the YTM has changed, except that the
Bond now has 2 semi-annual periods (1 year) left until maturity. Recompute the bond’s price and explain why it has or has not changed.
(3) Assuming the bond has 1 year to maturity, find its current yield (use the value found in part 2 to compute the current yield)
(4) Suppose Burlington’s Debt Rating changed to A-. What would happen to the price of the bond? Would the change in debt rating have a greater impact on the bond’s price when in had 2 ½ years to maturity or 1 year to maturity? Explain your answer.
BURLINGTON NORTHN SANTA FE OVERVIEW
Price:103.75
Coupon (%):6.125
Maturity Date:15-Mar-2009
Yield to Maturity (%):4.798
Current Yield (%):5.904
Debt Rating: BBB
Coupon Payment Frequency: Semi-Annual
First Coupon Date:15-Sep-1999
Type: Corporate Industry: Transportation
CALL SCHEDULE
This bond is not callable