FFN20303: Chapter 5 Measuring and Calculating Interest Rates and Financial asset Prices: Money and Capital Market Assignment, MSU, Malaysia

QUESTIONS:

1. A deposit of $500 (PV) made five years ago is worth $705.30 today (FV). The deposit pays interest semi-annually. What is the interest rate?

Note: If you press √ means that the reciprocal of power 2 (^2). In this       calculation, it refers to power 10@ ^ 10, therefore 10√
From calculator, you press 10 then SHIFT then ^..10 ^x√ 1.4106

 FV = PV (1 + r) ^t               – annually

 FV = PV (1 + r/2) ^tx2            – semiannually

1. How much would you have had to invest 21 years ago (t) in an account paying 6%(r) compounded annually to cover the cost of a $15,000 (FV) engagement ring for your fiancé?
2. Approximately how many years must one wait for an initial investment of $10,000 to triple in value if the investment earns 9% compounded annually?
3. During one year on a $250 deposit paying continuously compounded interest at an APR of 8%, how much interest can be accumulated?
   Interest = principal ´ rate ´ term (n) 
4. If your trust fund promises to pay you $25,000 on your 24th birthday (6years from today) and earns 9% compounded annually, then what is the trust fund’s present value?
5. If a $10,000 investment will return $25,000 to you in five years, then to the nearest percent what annual interest rate is being offered?
   FV    =    PV     (1 + r)^t
6. What is the present value of the following payment stream at an interest rate of 7%; $1000 today, $2000 at the end of year 1, $5000 at the end of year 3, $6000 at the end of year 5.
7. What is the present value of perpetuity of $1000 per annum starting immediately offering a 12% interest rate? (3 marks)PV perpetuity = FV / i
8. What is the APR on a 48-month loan on an $18,000 car, if you put $3000 down payment and the monthly payments are $373.28
   m   = number of payments in a year

   c    = annual interest cost

   N   = total number of payments

   P    = principal of the loan

   1. In order to buy a $25,000 car making $500 monthly payments for 48 months at 8%, how much will your down payment be?Monthly Payment =
   2. $10,000 borrowed at 8% is to be repaid in four equal annual payments. How much of the principal is amortized with the first payment
   3. 14. A bond matures in 12 years and pay 8 percent coupon annually. The bond has face value of RM1000 and currently sells for RM985. What is the bond’s current yield and yield to maturity?

       

      1. 1. Current yield. (2 marks)

       

       

      Coupon Payment = CR% x Par value

       

      Current Yield (%)        =     Coupon Payment

                                                      Value or Price of Bond

       

      8. Yield to maturity. (answer:8.19%)

      (4 marks)

      YTM = CP + (PV – Vb)/n

                                           (PV + Vb)/2

       

      15. Kufman Enterprise has bonds outstanding with a RM1,000 face value and 10 years left until maturity. The bonds have an 11 percent annual coupon payment. The current price of these bonds is RM1,175. Calculate:

       

      1. Current Yield (CY).

      (2 marks)

       

      1. Yield To Maturity (YTM).

      (4 marks)

       

      17. A bond that matures in 10 years sells for RM985. The bond has a face value of RM1,000 and a 7 percent annual coupon. Calculate;

       

      1. Current Yield (CY).

      (2 marks)

      1. Yield To Maturity (YTM).

      (4 marks)

       

      18. A 10-year, 12 percent semi-annually coupon bond, with a par value of RM1,000 sells for RM1,100. Calculate;

       

      1. Current Yield (CY).

      (2 marks)

      1. Yield To Maturity (YTM).

      (4 marks)

      19. A bond matures in 7 years sells for RM1,020. The bond has a face value of RM1,000 and a yield to maturity of 10 percent. The bond pays coupons annually. What is the bond current yield?

      (2 marks)

      Step 1 Find the coupon payment

       

      YTM (%) =   Coupon Payment+ (Par Value  – Bond Price)/ t

                                               (Par Value + Bond Price)/2

               

               Step 2 : Find the bond current yield

      Current Yield (%)        =     Coupon Payment

                                                      Value or Price of Bond

      20. The loan amount RM25,000 with nominal interest rate of 11 percent. Interest is calculated on a simple interest basis with a 365-day year. What is Minnerly’s interest charge for the first month (assuming 31 days in the month).

      (2 marks)

      Interest = principal ´ rate ´ term (n)