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FIN 534 Homework Set 2 A Graded Solution

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FIN 534 Homework Set 2 A Graded Solution

Use the following information for Questions 1 through 5:

Assume that you are nearing

graduation and have applied for a job with a local bank. The bank’s

evaluation process requires you to take an examination that covers several financial analysis techniques.

The first section of the test asks you to address these discounted cash flow analy

sis problems:

1.

What is the present value of the fol

lowing uneven cash flow stream

−

$50, $100, $75, and $50 at the

end of Years 0 through 3

?

The appropriate interest rate is 10%, compounded annually

.

2.

We sometimes need to find out how l

ong it will take a sum of money (or something else, such as

earnings, population, or prices) to

grow to some specified amount.

For example, if a company’s sales

are growing at a rate of 20% per year, how long will it take sales to double?

3.

Will

the future value be larger or smaller if we compound an initial amount more often than annually

—

for example, every 6 months, or semiannually

—

holding the stated interest rate constant? Why?

4.

What is the effective annual rate (EAR or EFF%)

for a nomi

nal rate of 12%, compounded

semiannually? Compounded quarterly? Compounded monthly? Compounded daily?

5.

Suppose that on January 1 you deposit $100 in an account that pays a

nominal (or quoted) interest

rate of 11.33463%, with interest added (compounded) daily. How much will you have in your account

on October 1, or 9 months later?

Use the following information f

or Questions 6

and 7

:

A firm issues a 10

–

year, $1,000

par value bond with a 10% annual coupon and a required rate of return is

10%

.

6.

What would be the...

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