ICWS4: TVM LUMP SUMS (CHAPTER 3)
1. Draw time lines from your perspective for the following: (a) You lend $350 two years from now and are repaid a total of $497 seven years from now; (b) You borrow $200 today and repay a total of $248 four years from now.
2. You invest $800 at an annual rate of 8% for twelve years. (a) How much more interest would you earn in year 7 with compound vs. simple interest? (b) How much more for the whole 12 years?
3. You plan to buy a car when you graduate in 4 years. The car you want currently costs $20,000 and car prices are expected to increase by 5% per year. What will your car cost by the time you graduate? Suppose you wait another 2 years after graduation to make your purchase?
4. If you can earn 3% per year, how much would you have to invest today to purchase the car in #3 above in four years? In six years?
5. A housing developer sold 1,254 lots available in 2008 but only 435 in 2014. What was the annual rate of sales of lots over this period?
6. A new CEO promises to increase company sales by 7% per year from its current level of $5,435,678 to a target level of $8 million. How long would it take for the new CEO to reach this goal?
7. If your investment doubles in value in 12 ½ years, what approximate annual rate of return would you have earned? If you could earn an annual rate of 4 5%, approximately how long would it take for your investment to double?
ICWS5: TVM MULTIPLE CASH FLOWS (CHAPTER 4)
1. Your parents tell you that if you apply yourself and earn a minimum grade of B- in Finance 3101 they will reward you by depositing in your account $500 next year, $1,000 the following year and $2,000 the year after that. If you can earn an annual rate of 6%, how much would you have in your account immediately after your parents' last deposit?
2. If your parents in #1 above can earn 8% per year, what size one-time deposit would they have to make today so that they would be able to keep their promise?
3. A security that is selling for $1,500 and promises to pay annual interest of $130 forever would have an annual yield of?
4. You deposit $100 for the next 15 years earning 10% per year. What would your balance be at the end of the 15 Years?
5. You borrow $100,000 for 18 years at an annual rate of 7%. What would be your fixed QUARTERLY loan payment?
6. For the loan in #5 above, what percent of your first payment would apply to the principal?
7. A financial planner recommends that you have accumulated $1.5 million by the time that you retire in 30 years. If you can earn an annual rate of return of 7%, how much must you invest for each of the next 30 years to achieve this goal?
ICWS6: INTEREST RATES & BONDS (CHAPTERS 5 & 6)
1. If the APR is 8% and compounding is weekly, what is (a) the periodic rate and (b) the EAR?
2. For a nominal interest rate of 12% and inflation of 4%, according to the Fisher Effect, what would be the approximate real rate?
3. You would like to increase your purchasing power next year by about 5%. If you expect prices to increase at a rate of 3% over the next year, what approximate increase would you need in your salary in order to achieve this increase in your purchasing power goal?
4. You have $425 today which is enough to buy 17 shirts. If the price of shirts is expected to increase by 2% over the next year, what approximate nominal rate would you have to earn to be able to buy 20 shirts next year?
5. Eighteen years ago a firm issued $1,000 par value bonds with a 6% annual coupon rate and a term to maturity of 30 years. Market interest rates have increased since then and similar bonds today would carry an annual coupon rate of 8%. What would these bonds sell for today if they made (a) annual coupon payments; and (b) semiannual coupon payments?
6. For the bond in #5 above, if annual rates on similar bonds are now 5%, what could you sell your bond for today assuming (a) annual compounding; and (b) semiannual compounding?
7. If the annual coupon bond in #5 above is selling for $1,150 today, according to the approximate YTM formula, what is its annual YTM?
8. True or False: The YTM in #7 above is the precise YTM on that bond?
9. A 25-year zero coupon bond is selling for $450. What was the annual YTM on that bond using (a) annual compounding; and (b) semiannual compounding?