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...