1 M MGMT 2023 Financial Management 1 - Tutorial Sheet # 2 Due October 23, 2016, 11:55 PM ECT. To be posted to Moodle using the Quiz Activity...

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MGMT 2023 Financial Management 1 – Tutorial Sheet # 2

Due October 23, 2016, 11:55 PM ECT.

To be posted to Moodle using the Quiz Activity Resource.

This paper will be out of a total of 52 points and will contribute up to 4% of your course work marks. Two attempts are allowed in Moodle and the higher of the two attempts will be entered in the grade book.

All the best.

1. How much will you have in an account set up for your son at the end of 3 years, if you have $6,500 to invest today at 7 percent interest compounded annually?

2. Play-2-Win is the latest lottery game in your country, and you happen to be the latest winner of $2.5 million. Your government has a guarantee on the funds and will not be paid before 10 years from today. You can however sell your claim today at a rate of 6 percent for a lump sum cash payment. What is the least amount you will sell your claim?

3. Assume you will receive $2,000 a year in Years 1 through 5, $3,000 a year in years 6

through 8, and $4,000 in year 9 with all cash flows to be received at the end of the year. If you require a return of 14 percent annually, what is the present value of these cash flows?

4. Beginning this year, Mary is planning to save $2,500 each year for the next six years to take a vacation to commemorate the seventh year of her career. Assuming the interest rate offered by her bank is 8 percent annually, how much will Mary have in the account at the end of seven years? If Mary increases her savings to $3,500 annually, will this be enough to take care of her vacation which is estimated to cost $30,000.

5. Your grandmother gave you an inheritance of $65,000, and you have done some shopping around for the best interest rates over the next year and is about to decide on which would offer you the best return.

a. Which investment offers you the highest EAR?

Stated Rate Compounding

7.10% Annual

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6.90% Semiannual

6.85% Monthly

b. Now assume that you wish to invest your money for only six months and the annual compounded rate of 7.10 percent is not available. Which of the remaining investments would you choose?

6. A profitable business venture promises to pay investors a monthly cash return of $900 for the next seven years. Having studies other investment alternatives, you believe that a reasonable return on your investment should be 15 percent compounded monthly.

a) How much should you pay for such an investment?

b) What will be the total sum of cash you will receive over the next seven years?

7. Malcolm Jones borrowed $15,000 at a 14 percent annual interest rate to be repaid over three years. The loan is amortized into three equal annual end-of-year payments. Calculate the annual end-of-year loan payment.

8. Which of the following statements are most correct?

a. Long-term bonds have more interest rate price risk, but less reinvestment rate risk than short-term bonds.

b. Bonds with higher coupons have more interest rate price risk, but less reinvestment rate risk than bonds with lower coupons.

c. If interest rates remain constant for the next five years, the price of a discount bond will remain the same for the next five years.

d. If a bond is selling at par value, its current yield equals its yield to maturity.

e. If a bond is selling at a discount to par, its current yield will be less than its yield to

maturity.

f. All else equal, bonds with longer maturities have more interest rate (price) risk

than do bonds with shorter maturities.

9. Which of the following statements on bond yield and price relationship are correct?

a. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must

also exceed its coupon rate.

b. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less

than its maturity value.

c. If two bonds have the same maturity, the same yield to maturity, and the same level

of risk, the bonds should sell for the same price regardless of the bond’s coupon rate.

d. All else equal, an increase in interest rates will have a greater effect on the prices of long-term bonds than it will on the prices of short-term bonds.

e. An increase in interest rates will have a greater effect on a zero coupon bond with 10

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years maturity than it will have on a 9-year bond with a 10 percent annual coupon.

10. A bond with a face value of $1,000 has a 10-year maturity and an 8.5 percent annual coupon. The bond has a current yield of 8 percent. What is the bond’s yield to maturity?

11. MJI Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent.

The par value of the bonds is $1,000. The bonds have a 10 percent coupon rate and

pay interest on a semiannual basis. Assuming there are no changes to interest rates

during the course of the year, what are the current yield and capital gains yield on the

bonds for this year?

12. A bond that matures in 10 years sells for $925. The bond has a face value of $1,000 and an 8 percent annual coupon.

i. What is the bond’s current yield?

ii. What is the bond’s YTM?

iii. Assume the YTM remains the same for the next three years, what will be the price of the bond three years from today?

13. The following is the balance sheet for XYZ Corporation’s as at December 31, 2015

The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000. They mature in 10 years’ time. The yield to maturity is 12 percent, so the bonds now sell below par. Determine the current market value of the firm’s debt?

14. Match the following sentences to the most correct concept.

The process of accumulating interest in an investment over time to earn more interest is termed .

The present value of a future cash flow to determine its value today is known as the

.

The amount an investment is worth after one or more time periods is referred to as

_.

Interest earned on the principal and may be for a number of years may be called

_.

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is referred to as .

The process of finding the present value of some future amount is called .