# Homework Assignment #2: Answer Key

Save this PDF as:

Size: px
Start display at page:

## Transcription

1 Homework Assignment #2: Answer Key Chapter 4: #3 Assuming that the current interest rate is 3 percent, compute the value of a five-year, 5 percent coupon bond with a face value of \$,000. What happens if the interest rate goes up to 4 percent? Answer: The value of a coupon bond comes from two components: the value of the stream of coupon payments and the value of the face value repaid at maturity. Note: the coupon rate need not be the same as the interest rate. The coupon rate is given at the beginning of the bond. So, the coupon rate gives a \$50 interest payments every period. The present value calculation for 3 percent interest would be Present Value = Present Value Coupons + Present Value Principal [ 50 = (.03) + 50 (.03) (.03) (.03) ] (.03) (.03) 5 = = 9.60 Since the interest rate is less than the coupon rate, the value of the bond exceeds the face value of 00. If the interest where to rise to \$ percent the present value of the bond would be Present Value = Present Value Coupons + Present Value Principal [ 50 = (.04) + 50 (.04) (.04) (.04) ] (.04) (.04) 5 = = The increase in the interest rate has reduced the value of the bond. #6: You decide you would like to retire at age 65 and expect to live until you are 85. You figure that you can live nicely on \$50,000 per year.. (a) Describe the calculation you need to make to determine how much you must save to purchase an annuity paying \$50,000 per year for the rest of your life. Assume the interest rate is 7 percent. Answer: You find this by simply getting the present value of the stream of \$50,000 payments for the 20 years of your remaining life. This can be found by using the following formula. Present Value = ( ) ( (.07) 20 ) = = \$529, 700 Thus, you are indifferent (or more importantly an annuity firm) is indifferent between the stream of 20, \$50,000 payments and \$529,700 in the bank. So you should be able to purchase the annuity for \$529,700.

2 (b) How would your calculation change if you expected inflation to average 2 percent for the rest of your life? Answer: Assuming that you still believe you need \$50,000 per year, the inflation rate would increase the nominal interest rate in this environment from 7 to 9 percent. Thus the present value calculation would be Present Value = ( ) ( ) (.09) 20 = = \$456, 428 The price of the annuity has fallen the future \$50,000 payments are discounted at a quicker rate. In reality how would this affect the price of the annuity? Typically, retirees don t think about keeping the same \$50,000 per year in payments, they want the buying power of their payments to stay the same. So, if inflation were 2 percent, we would typically want our payments to also grow by 2 percent which would cancel out the increase in the nominal interest rate from 497 to 9 percent. Thus, if this is how households value annuities the price would be unchanged. #8: Some friends of yours have just had a child. Realizing the power of compound interest, they are considering investing for their child s college education, which will begin in 8 years. Assume that the cost of a college education today is \$25,000; there is no inflation; and there are no taxes on interest income that is used to pay college tuition and expenses. a. If the interest rate is 5 percent, how much money will your friends need to put into their savings account today to have \$25,000 in 8 years? Answer: This is an application of future value, in this case you know the future value and need to find the present amount which generates that value. You need to solve = x(.05) = x x = If we place \$5, in the bank today, this would generate \$25,000 in 8 years. b. What if the interest rate is 0 percent? Answer: Simply alter the previous question for a 0 percent interest rate. Thus, = x (.) = x x =

3 If we get a return of 0 percent we would only need to put \$22, in the bank today to get 25,000 in 8 years c. The chance that a college education will cost the same in 8 years from now seems remote. Assuming that the price will rise 3 percent per year and that today s interest rate is 8 percent, what will your friend s investment need to be? Answer: This is really a two part question. First we need to figure out what the cost of a college education will be in 8 years. This is an application of future value. So, x = 25000(.03) 8 x = So, given the path of prices we should expect a college education to cost \$22800 in 28 years. So now we need to find how much we should invest today to generate \$22800 in 8 years given 8 percent interest. This is just like parts a and b = x(.08) = 3.996x x = We would need an initial investment of \$53, d. Return to the case with 5 percent interest and no inflation. Assume that your friend doesn t have enough to make the initial investment. Instead, they think they will be able to split their investment into two equal parts, one invest immediately, and the second in five years. How would you compute the required size of the two equal investments made five years apart? Answer: This is not as difficult as you may think. The goal is simple two investment need to generate a combined future value of \$25,000. The setup for this problem goes as follows = Future Value of Initial Investment + Future Value of Second Investment The key difference in the investments is that the first investment will compound for 8 years and the second will only compound for 3 years. So we have = x(.05) 8 + x(.05) = x x = x x = Your friend will need to make 2 investments of \$29,22.59 to achieve \$25,000 in 8 years. 3

4 #5 Recently, some lucky person won the lottery. The lottery winnings were reported to be \$85.5 million. In reality, the winner got a choice of \$2.85 million per year for 30 years or \$46 million today.. (a) Explain briefly why winning \$2.85 million per year for 30 years in not equivalent to winning \$85.5 million. Answer: Sure the total dollars received are the same, but a dollar today is does not have the same value as a dollar tomorrow. Thus, because people discount the value of future money, the stream of 30 \$2.85 million payments has a lower value than \$85.5 million. (b) The evening news interviews a group of people the day after the winner was announced. When asked, most of them responded that, if they were the lucky winner, they would take the \$46 million upfront payment. Suppose that you were the lucky winner. How would you decide between the annual installments or the up-front payment? Answer: This really comes down to how fast you discount the future. If you discount the future quickly, then you would be likely to take the up front payments. If you are more patient the likely choice is that you would take the stream of payments over the lump sum of \$46 million. Actually, given the numbers in the problem, we can make an educated guess on how you discount the future. The key is to find the break even rate of discounting. That would occur at the point where the present value of the stream of 30 payments just equals \$46 million.thus, we need to find ( \$2, 850, 000 \$46, 000, 000 = r ) ( ) ( + r) 40 Using this formulation we find r is approximately 5.62%. People with discount rates above 5.62% would choose the lump sum and those below would choose to take the stream of 30 payments. Chapter 5: # Consider a game in which a coin will be flipped three times. For each heads you will be paid 0. Assume that the coin has a two-thirds probability of coming up heads.. (a) Construct a table of the possibilities and probabilities of this game.answer: The following table describes the possible outcomes of this game, in this version of the game, the ordering of heads and tails does not matter, but I will write out the order which will become important in part d. With ordering there 8 4

6 Possibility Event Probability Payout H,H,H = 8 27 \$300 2 H,H,T = H,T,H = H,T,T = T,H,H = T,H,T = T,T,H = T,T,T = 27 Given this change, the expected value of this game is going to drop. We can see this by recalculating the expected value. We find EV = = = \$85.9 The price you would be willing to pay to play this game is going to fall. #4 Assume that the economy can experience high growth, normal growth, or recession. You expect the following stock-market returns for the coming year under these conditions State of the Economy Probability Return High Growth % Normal Growth % Recession 0. -5% a. Compute the expected value of a 00 investment both in dollars and as a percentage over the coming year. Answer: Given the above information, we can construct a frequency distribution of the payoff profile of this investment. State of the Economy Probability Payoff High Growth 0.2 \$300 Normal Growth 0.7 \$20 Recession 0. \$850 Given this we can construct the expected payoff from this investment EV = (300.2) + (20.7) + (850.) EV = \$29 We find a expected value of \$29 or and expected profit of \$29 which as a percentage of the initial investment is = 2.9%. 6

7 b. Compute the standard deviation of the return as a percentage over the coming year. Answer: Here is the computation of the standard deviation for this investment SD = ((300 29) 2.2) + ((20 29) 2.7) + ((850 29) 2.) = 7.0 The standard deviation of the payoffs for this investment is \$7.0 or as a percentage of the initial investment is.7%. c. If the risk-free rate of return is 7 percent, what is the risk premium for a stock-market investment? Answer: The risk premium is an return over the risk free rate that is brought on by the risk in the investment. In this example, all of the extra return is generated by risk so the risk premium is Risk Premium =2.9%-7%=5.9% #8 Mortgages increase the risk faced by homeowners.. (a) Explain how. Answer: Mortgages are collateralized loans, meaning that if the owner defaults on the loan, the bank gets the house. In this situation the bank only faces the risks associated with the value of the home and their ability to sell the home. The homeowner faces a potentially large loss if they default on the loan. The lose the house. (b) What happens to the homeowner s risk as the down payment on the house rises from 0 percent to 50 percent? Answer: In some ways this actually shifts more risk onto the homeowner and away from the bank. As more of the house is owned by the homeowner, and defualting would involving losing the entire 50% put down. At the same time the risk can also be thought of as decrease because the size of the mortgage payments should fall as the down payment goes up. This reduces the probability of a default taking place. # Which of hte investments in the table below would be most attractive to a risk- averse investor? How would your answer differ if the investor was described as risk neutral? Investment Expected Value Standard Deviation A 75 0 B 00 0 C

8 Answer: For the risk averse invetor the clear choice is investment B, it offeres the highest value for the lowest risk. For the risk neutral investor, the answer only changes in one way. This investor would actually be indifferent between investments B and C. The risk neutral investor looks only at the expected value of an investment. The risk of the investment is ignored by the risk neutral investor. 8

### Chapter 4 Problems and Solutions

ECO 3223 - Spring 2007 Chapter 4 1) Compute the future value of \$100 at an 8 percent interest rate five, ten and fifteen years into the future. Future value in 5 years = \$100*(1.08) 5 = \$146.93 Future

FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

### Take-Home Problem Set

Georgia State University Department of Finance MBA 8622 Fall 2001 MBA 8622: Corporation Finance Take-Home Problem Set Instructors: Lalitha Naveen, N. Daniel, C.Hodges, A. Mettler, R. Morin, M. Shrikhande,

### CHAPTER 5. Interest Rates. Chapter Synopsis

CHAPTER 5 Interest Rates Chapter Synopsis 5.1 Interest Rate Quotes and Adjustments Interest rates can compound more than once per year, such as monthly or semiannually. An annual percentage rate (APR)

### Chapter 2 Present Value

Chapter 2 Present Value Road Map Part A Introduction to finance. Financial decisions and financial markets. Present value. Part B Valuation of assets, given discount rates. Part C Determination of risk-adjusted

### How to Calculate Present Values

How to Calculate Present Values Michael Frantz, 2010-09-22 Present Value What is the Present Value The Present Value is the value today of tomorrow s cash flows. It is based on the fact that a Euro tomorrow

### Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams

Chapter 6 Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams 1. Distinguish between an ordinary annuity and an annuity due, and calculate present

### Appendix C- 1. Time Value of Money. Appendix C- 2. Financial Accounting, Fifth Edition

C- 1 Time Value of Money C- 2 Financial Accounting, Fifth Edition Study Objectives 1. Distinguish between simple and compound interest. 2. Solve for future value of a single amount. 3. Solve for future

### Economics 1011a: Intermediate Microeconomics

Lecture 11: Choice Under Uncertainty Economics 1011a: Intermediate Microeconomics Lecture 11: Choice Under Uncertainty Tuesday, October 21, 2008 Last class we wrapped up consumption over time. Today we

### 2. How is a fund manager motivated to behave with this type of renumeration package?

MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff

### Time Value of Money. Background

Time Value of Money (Text reference: Chapter 4) Topics Background One period case - single cash flow Multi-period case - single cash flow Multi-period case - compounding periods Multi-period case - multiple

### Probability and Expected Value

Probability and Expected Value This handout provides an introduction to probability and expected value. Some of you may already be familiar with some of these topics. Probability and expected value are

### 1. Overconfidence {health care discussion at JD s} 2. Biased Judgments. 3. Herding. 4. Loss Aversion

In conditions of laissez-faire the avoidance of wide fluctuations in employment may, therefore, prove impossible without a far-reaching change in the psychology of investment markets such as there is no

### Exercise 6 Find the annual interest rate if the amount after 6 years is 3 times bigger than the initial investment (3 cases).

Exercise 1 At what rate of simple interest will \$500 accumulate to \$615 in 2.5 years? In how many years will \$500 accumulate to \$630 at 7.8% simple interest? (9,2%,3 1 3 years) Exercise 2 It is known that

### International Money and Banking: 12. The Term Structure of Interest Rates

International Money and Banking: 12. The Term Structure of Interest Rates Karl Whelan School of Economics, UCD Spring 2015 Karl Whelan (UCD) Term Structure of Interest Rates Spring 2015 1 / 35 Beyond Interbank

### MATH 10: Elementary Statistics and Probability Chapter 4: Discrete Random Variables

MATH 10: Elementary Statistics and Probability Chapter 4: Discrete Random Variables Tony Pourmohamad Department of Mathematics De Anza College Spring 2015 Objectives By the end of this set of slides, you

### Appendix. Time Value of Money. Financial Accounting, IFRS Edition Weygandt Kimmel Kieso. Appendix C- 1

C Time Value of Money C- 1 Financial Accounting, IFRS Edition Weygandt Kimmel Kieso C- 2 Study Objectives 1. Distinguish between simple and compound interest. 2. Solve for future value of a single amount.

### Applications of Geometric Se to Financ Content Course 4.3 & 4.4

pplications of Geometric Se to Financ Content Course 4.3 & 4.4 Name: School: pplications of Geometric Series to Finance Question 1 ER before DIRT Using one of the brochures for NTM State Savings products,

### Goals. The Time Value of Money. First example. Compounding. Economics 71a Spring 2007 Mayo, Chapter 7 Lecture notes 3.1

Goals The Time Value of Money Economics 7a Spring 2007 Mayo, Chapter 7 Lecture notes 3. More applications Compounding PV = present or starting value FV = future value R = interest rate n = number of periods

### Choice Under Uncertainty

Decision Making Under Uncertainty Choice Under Uncertainty Econ 422: Investment, Capital & Finance University of ashington Summer 2006 August 15, 2006 Course Chronology: 1. Intertemporal Choice: Exchange

### Chapter 4 - Practice Problems 1

Chapter 4 - Practice Problems SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. Provide an appropriate response. ) Compare the relative frequency formula

### Chapter 07 Interest Rates and Present Value

Chapter 07 Interest Rates and Present Value Multiple Choice Questions 1. The percentage of a balance that a borrower must pay a lender is called the a. Inflation rate b. Usury rate C. Interest rate d.

### Mortgage Basics Glossary of Terms

Mortgage Basics Glossary of Terms Buying a home is an important financial decision. It is important to familiarize yourself with the features of the different types of mortgages, so that you understand

### Section 8.1. I. Percent per hundred

1 Section 8.1 I. Percent per hundred a. Fractions to Percents: 1. Write the fraction as an improper fraction 2. Divide the numerator by the denominator 3. Multiply by 100 (Move the decimal two times Right)

### Annuities and Sinking Funds

Annuities and Sinking Funds Sinking Fund A sinking fund is an account earning compound interest into which you make periodic deposits. Suppose that the account has an annual interest rate of compounded

### GREAT LAKES ADVISORS THE PENSION PROMISE SESSION THREE. A Presentation to the: National Conference on Public Employee Retirement Systems

GREAT LAKES ADVISORS THE PENSION PROMISE SESSION THREE Presenter: Kelly Weller Managing Director, Client Service (312) 353-3733 kweller@greatlakesadvisors.com A Presentation to the: National Conference

### Chapter 22: Borrowings Models

October 21, 2013 Last Time The Consumer Price Index Real Growth The Consumer Price index The official measure of inflation is the Consumer Price Index (CPI) which is the determined by the Bureau of Labor

### CHAPTER 6 DISCOUNTED CASH FLOW VALUATION

CHAPTER 6 DISCOUNTED CASH FLOW VALUATION Answers to Concepts Review and Critical Thinking Questions 1. The four pieces are the present value (PV), the periodic cash flow (C), the discount rate (r), and

### FinQuiz Notes 2 0 1 4

Reading 5 The Time Value of Money Money has a time value because a unit of money received today is worth more than a unit of money to be received tomorrow. Interest rates can be interpreted in three ways.

### Geometric Series and Annuities

Geometric Series and Annuities Our goal here is to calculate annuities. For example, how much money do you need to have saved for retirement so that you can withdraw a fixed amount of money each year for

### MAT116 Project 2 Chapters 8 & 9

MAT116 Project 2 Chapters 8 & 9 1 8-1: The Project In Project 1 we made a loan workout decision based only on data from three banks that had merged into one. We did not consider issues like: What was the

### 1 Interest rates, and risk-free investments

Interest rates, and risk-free investments Copyright c 2005 by Karl Sigman. Interest and compounded interest Suppose that you place x 0 (\$) in an account that offers a fixed (never to change over time)

### Exercise 1 for Time Value of Money

Exercise 1 for Time Value of Money MULTIPLE CHOICE 1. Which of the following statements is CORRECT? a. A time line is not meaningful unless all cash flows occur annually. b. Time lines are useful for visualizing

### 1. If you wish to accumulate \$140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%?

Chapter 2 - Sample Problems 1. If you wish to accumulate \$140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%? 2. What will \$247,000 grow to be in

### Applying Time Value Concepts

Applying Time Value Concepts C H A P T E R 3 based on the value of two packs of cigarettes per day and a modest rate of return? Let s assume that Lou will save an amount equivalent to the cost of two packs

### Grade 7/8 Math Circles Fall 2012 Probability

1 University of Waterloo Faculty of Mathematics Centre for Education in Mathematics and Computing Grade 7/8 Math Circles Fall 2012 Probability Probability is one of the most prominent uses of mathematics

### Lesson 1. Basics of Probability. Principles of Mathematics 12: Explained! www.math12.com 314

Lesson 1 Basics of Probability www.math12.com 314 Sample Spaces: Probability Lesson 1 Part I: Basic Elements of Probability Consider the following situation: A six sided die is rolled The sample space

### Econ 330 Exam 1 Name ID Section Number

Econ 330 Exam 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate of monetary growth

### V. RANDOM VARIABLES, PROBABILITY DISTRIBUTIONS, EXPECTED VALUE

V. RANDOM VARIABLES, PROBABILITY DISTRIBUTIONS, EXPETED VALUE A game of chance featured at an amusement park is played as follows: You pay \$ to play. A penny and a nickel are flipped. You win \$ if either

### Use the option quote information shown below to answer the following questions. The underlying stock is currently selling for \$83.

Problems on the Basics of Options used in Finance 2. Understanding Option Quotes Use the option quote information shown below to answer the following questions. The underlying stock is currently selling

### TIME VALUE OF MONEY. Return of vs. Return on Investment: We EXPECT to get more than we invest!

TIME VALUE OF MONEY Return of vs. Return on Investment: We EXPECT to get more than we invest! Invest \$1,000 it becomes \$1,050 \$1,000 return of \$50 return on Factors to consider when assessing Return on

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

### Chapter 02 How to Calculate Present Values

Chapter 02 How to Calculate Present Values Multiple Choice Questions 1. The present value of \$100 expected in two years from today at a discount rate of 6% is: A. \$116.64 B. \$108.00 C. \$100.00 D. \$89.00

### Present Value. Aswath Damodaran. Aswath Damodaran 1

Present Value Aswath Damodaran Aswath Damodaran 1 Intuition Behind Present Value There are three reasons why a dollar tomorrow is worth less than a dollar today Individuals prefer present consumption to

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

### .4 120 +.1 80 +.5 100 = 48 + 8 + 50 = 106.

Chapter 16. Risk and Uncertainty Part A 2009, Kwan Choi Expected Value X i = outcome i, p i = probability of X i EV = pix For instance, suppose a person has an idle fund, \$100, for one month, and is considering

### Chapter 6. 1. What is the probability that a card chosen from an ordinary deck of 52 cards is an ace? Ans: 4/52.

Chapter 6 1. What is the probability that a card chosen from an ordinary deck of 52 cards is an ace? 4/52. 2. What is the probability that a randomly selected integer chosen from the first 100 positive

### Financial Markets and Valuation - Tutorial 1: SOLUTIONS. Present and Future Values, Annuities and Perpetuities

Financial Markets and Valuation - Tutorial 1: SOLUTIONS Present and Future Values, Annuities and Perpetuities (*) denotes those problems to be covered in detail during the tutorial session (*) Problem

### - the preference for current consumption increases.

Intuition behind the Rule There are three reasons why a dollar tomorrow is worth less than a dollar today Individuals prefer present consumption to future consumption. To induce people to consumption you

Buyer s Guide for Deferred Annuities Fixed Table of Contents What Is an Annuity?...2 When Annuities Start to Make Income Payments... 2 How Deferred Annuities Are Alike... 2 How Deferred Annuities Are Different...

### U.S. Treasury Securities

U.S. Treasury Securities U.S. Treasury Securities 4.6 Nonmarketable To help finance its operations, the U.S. government from time to time borrows money by selling investors a variety of debt securities

### Time Value of Money. 15.511 Corporate Accounting Summer 2004. Professor S. P. Kothari Sloan School of Management Massachusetts Institute of Technology

Time Value of Money 15.511 Corporate Accounting Summer 2004 Professor S. P. Kothari Sloan School of Management Massachusetts Institute of Technology July 2, 2004 1 LIABILITIES: Current Liabilities Obligations

### 33 DISCOUNTED PRESENT VALUE

33 DISCOUNTED PRESENT VALUE Purpose: To illustrate the idea of discounted present value with computations of the value of payments to be received in the future at different rates of interest. To use discounted

### Final Exam Practice Set and Solutions

FIN-469 Investments Analysis Professor Michel A. Robe Final Exam Practice Set and Solutions What to do with this practice set? To help students prepare for the final exam, three practice sets with solutions

### 5.5 The Opportunity Cost of Capital

Problems 161 The correct discount rate for a cash flow is the expected return available in the market on other investments of comparable risk and term. If the interest on an investment is taxed at rate

### Bond Valuation. What is a bond?

Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities called bonds. A bond

### Demand and supply of health insurance. Folland et al Chapter 8

Demand and supply of health Folland et al Chapter 8 Chris Auld Economics 317 February 9, 2011 What is insurance? From an individual s perspective, insurance transfers wealth from good states of the world

### , plus the present value of the \$1,000 received in 15 years, which is 1, 000(1 + i) 30. Hence the present value of the bond is = 1000 ;

2 Bond Prices A bond is a security which offers semi-annual* interest payments, at a rate r, for a fixed period of time, followed by a return of capital Suppose you purchase a \$,000 utility bond, freshly

### Time Value of Money Dallas Brozik, Marshall University

Time Value of Money Dallas Brozik, Marshall University There are few times in any discipline when one topic is so important that it is absolutely fundamental in the understanding of the discipline. The

### Investment, Time, and Present Value

Investment, Time, and Present Value Contents: Introduction Future Value (FV) Present Value (PV) Net Present Value (NPV) Optional: The Capital Asset Pricing Model (CAPM) Introduction Decisions made by a

### Expected Value and the Game of Craps

Expected Value and the Game of Craps Blake Thornton Craps is a gambling game found in most casinos based on rolling two six sided dice. Most players who walk into a casino and try to play craps for the

Buyer s Guide for Deferred Annuities Table of Contents What Is an Annuity?... 1 When Annuities Start to Make Income Payments... 1 How Deferred Annuities Are Alike... 1 How Deferred Annuities Are Different...

### The Value of Money Over Time: Structured Settlements and How Other Financial Situations are Impacted by Time

The Value of Money Over Time: Structured Settlements and How Other Financial Situations are Impacted by Time Founded in 1988, Settlement Capital Corporation is credited with establishing the secondary

### CHAPTER 4. The Time Value of Money. Chapter Synopsis

CHAPTER 4 The Time Value of Money Chapter Synopsis Many financial problems require the valuation of cash flows occurring at different times. However, money received in the future is worth less than money

### Present Value Concepts

Present Value Concepts Present value concepts are widely used by accountants in the preparation of financial statements. In fact, under International Financial Reporting Standards (IFRS), these concepts

### Interest Rates: Loans, Credit Cards, and Annuties. Interest Rates: Loans, Credit Cards, and Annuties 1/43

Interest Rates: Loans, Credit Cards, and Annuties Interest Rates: Loans, Credit Cards, and Annuties 1/43 Last Time Last time we discussed compound interest and saw that money can grow very large given

### SAMPLE MID-TERM QUESTIONS

SAMPLE MID-TERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID- TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,

### PowerPoint. to accompany. Chapter 5. Interest Rates

PowerPoint to accompany Chapter 5 Interest Rates 5.1 Interest Rate Quotes and Adjustments To understand interest rates, it s important to think of interest rates as a price the price of using money. When

### Chapter 6 APPENDIX B. The Yield Curve and the Law of One Price. Valuing a Coupon Bond with Zero-Coupon Prices

196 Part Interest Rates and Valuing Cash Flows Chapter 6 APPENDIX B The Yield Curve and the Law of One Price Thus far, we have focused on the relationship between the price of an individual bond and its

### debt_wbn_pv_st01 Title page Debt» What's Behind the Numbers?» Scenic Video www.navigatingaccounting.com

Title page Debt» What's Behind the Numbers?» Scenic Video www.navigatingaccounting.com Agenda Introduction Single cash flow Future value formula Present value formula Tables Multiple cash flows Present

### How to calculate present values

How to calculate present values Back to the future Chapter 3 Discounted Cash Flow Analysis (Time Value of Money) Discounted Cash Flow (DCF) analysis is the foundation of valuation in corporate finance

### Fin 3312 Sample Exam 1 Questions

Fin 3312 Sample Exam 1 Questions Here are some representative type questions. This review is intended to give you an idea of the types of questions that may appear on the exam, and how the questions might

### The Time Value of Money

The following is a review of the Quantitative Methods: Basic Concepts principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: The Time

1.0 ALTERNATIVE SOURCES OF FINANCE Module 1: Corporate Finance and the Role of Venture Capital Financing Alternative Sources of Finance TABLE OF CONTENTS 1.1 Short-Term Debt (Short-Term Loans, Line of

### NAIC Buyer s Guide for Fixed Deferred Annuities

NAIC Buyer s Guide for Fixed Deferred Annuities It s important that you understand how annuities can be different from each other so you can choose the type of annuity that s best for you. The purpose

### Exam #1 (100 points)

Exam #1 (100 points) Take the exam during an uninterrupted period of no more than 2 hours. (It should not take that long.) The space provided below each question should be sufficient for your answer, but

### Chapter 6 Contents. Principles Used in Chapter 6 Principle 1: Money Has a Time Value.

Chapter 6 The Time Value of Money: Annuities and Other Topics Chapter 6 Contents Learning Objectives 1. Distinguish between an ordinary annuity and an annuity due, and calculate present and future values

### TIME VALUE OF MONEY #6: TREASURY BOND. Professor Peter Harris Mathematics by Dr. Sharon Petrushka. Introduction

TIME VALUE OF MONEY #6: TREASURY BOND Professor Peter Harris Mathematics by Dr. Sharon Petrushka Introduction This problem assumes that you have mastered problems 1-5, which are prerequisites. In this

### Introduction to the Practice of Statistics Sixth Edition Moore, McCabe

Introduction to the Practice of Statistics Sixth Edition Moore, McCabe Section 5.1 Homework Answers 5.9 What is wrong? Explain what is wrong in each of the following scenarios. (a) If you toss a fair coin

### TIME VALUE OF MONEY. In following we will introduce one of the most important and powerful concepts you will learn in your study of finance;

In following we will introduce one of the most important and powerful concepts you will learn in your study of finance; the time value of money. It is generally acknowledged that money has a time value.

### FinQuiz Notes 2 0 1 5

Reading 5 The Time Value of Money Money has a time value because a unit of money received today is worth more than a unit of money to be received tomorrow. Interest rates can be interpreted in three ways.

### Chapter 4: Time Value of Money

FIN 301 Homework Solution Ch4 Chapter 4: Time Value of Money 1. a. 10,000/(1.10) 10 = 3,855.43 b. 10,000/(1.10) 20 = 1,486.44 c. 10,000/(1.05) 10 = 6,139.13 d. 10,000/(1.05) 20 = 3,768.89 2. a. \$100 (1.10)

Chapter 6 Interest rates and Bond Valuation 2012 Pearson Prentice Hall. All rights reserved. 4-1 Interest Rates and Required Returns: Interest Rate Fundamentals The interest rate is usually applied to

### KENT FAMILY FINANCES

FACTS KENT FAMILY FINANCES Ken and Kendra Kent have been married twelve years and have twin 4-year-old sons. Kendra earns \$78,000 as a Walmart assistant manager and Ken is a stay-at-home dad. They give

### Basic Financial Tools: A Review. 3 n 1 n. PV FV 1 FV 2 FV 3 FV n 1 FV n 1 (1 i)

Chapter 28 Basic Financial Tools: A Review The building blocks of finance include the time value of money, risk and its relationship with rates of return, and stock and bond valuation models. These topics

### BOND - Security that obligates the issuer to make specified payments to the bondholder.

Bond Valuation BOND - Security that obligates the issuer to make specified payments to the bondholder. COUPON - The interest payments paid to the bondholder. FACE VALUE - Payment at the maturity of the

### Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions.

Bond Pricing - 1 Chapter 11 Several Assumptions: To simplify the analysis, we make the following assumptions. 1. The coupon payments are made every six months. 2. The next coupon payment for the bond is

### Finance 350: Problem Set 6 Alternative Solutions

Finance 350: Problem Set 6 Alternative Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. I. Formulas

### FNCE 301, Financial Management H Guy Williams, 2006

Review In the first class we looked at the value today of future payments (introduction), how to value projects and investments. Present Value = Future Payment * 1 Discount Factor. The discount factor

### Discounted Cash Flow Valuation

Discounted Cash Flow Valuation Chapter 5 Key Concepts and Skills Be able to compute the future value of multiple cash flows Be able to compute the present value of multiple cash flows Be able to compute

### NAIC Buyer s Guide for Deferred Annuities

NAIC Buyer s Guide for Deferred Annuities Prepared by the National Association of Insurance Commissioners The National Association of Insurance Commissioners is an association of state insurance regulatory

### The Time Value of Money

The Time Value of Money This handout is an overview of the basic tools and concepts needed for this corporate nance course. Proofs and explanations are given in order to facilitate your understanding and

### C(t) (1 + y) 4. t=1. For the 4 year bond considered above, assume that the price today is 900\$. The yield to maturity will then be the y that solves

Economics 7344, Spring 2013 Bent E. Sørensen INTEREST RATE THEORY We will cover fixed income securities. The major categories of long-term fixed income securities are federal government bonds, corporate

### Introduction to Game Theory IIIii. Payoffs: Probability and Expected Utility

Introduction to Game Theory IIIii Payoffs: Probability and Expected Utility Lecture Summary 1. Introduction 2. Probability Theory 3. Expected Values and Expected Utility. 1. Introduction We continue further

### Bonds are IOUs. Just like shares you can buy bonds on the world s stock exchanges.

Investing in bonds Despite their names, ShareScope and SharePad are not just all about shares. They can help you with other investments as well. In this article I m going to tell you how you can use the

### CHAPTER 6. Accounting and the Time Value of Money. 2. Use of tables. 13, 14 8 1. a. Unknown future amount. 7, 19 1, 5, 13 2, 3, 4, 6

CHAPTER 6 Accounting and the Time Value of Money ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems 1. Present value concepts. 1, 2, 3, 4, 5, 9, 17, 19 2. Use

### Reverse Mortgages A Source of Funds for Retirement?

Reverse Mortgages A Source of Funds for Retirement? Many people make it a goal of their financial lives to invest in a home. It is a great accomplishment when that last mortgage payment is made. Can a