Problem 1. A company has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers. The collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.
(a) If the company has $5 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up?
(b) How much can the company earn in dollars per year on short-term investments made possible by the freed-up cash?
Problem 2. Swartz and Sons pays a 12 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 10 percent. The bonds are currently callable at $1,060. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. This is the normal definition we use.
(a) Find the theoretical market value of the bonds using semiannual analysis.
(b) Do you think the bonds will sell for the price you arrived at in part (a)? Why?
Problem 3. Larry Smith calls his broker to inquire about purchasing a bond. His broker quotes a price of $1,180. Larry is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 14 percent interest, and it has 25 years remaining until maturity. The current yield to maturity on similar bonds is 12 percent. Compute the new price of the bond and comment on whether you think it is overpriced in the marketplace.
Problem 4. Audrey Wright has just retired after 25 years after teaching high school. Her total pension funds have an accumulated value of $180,000, and her life expectancy is 15 more years. Her pension fund manager assumes she can earn a 9 percent return on her assets. What will be her yearly annuity for the next 15 years?