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BA 540 (Homework-1)

1) Given a $900 expected cash flow in 6 years at an 8% annual interest rate, the present value today is $567.15. 2) Investing $20,000 in a retirement account expecting 10% annual returns will yield $134,550 after 20 years. 3) A 10-year contract promising $1,000 yearly payments with the first payment in 1 year has a present value of $7,360.09 at a 6% discount rate.

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127 views6 pages

BA 540 (Homework-1)

1) Given a $900 expected cash flow in 6 years at an 8% annual interest rate, the present value today is $567.15. 2) Investing $20,000 in a retirement account expecting 10% annual returns will yield $134,550 after 20 years. 3) A 10-year contract promising $1,000 yearly payments with the first payment in 1 year has a present value of $7,360.09 at a 6% discount rate.

Uploaded by

Maria
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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1) You expect a $900 cash flow, 6 years from today.

Assuming a required rate of return of 8% (APR, compounded annually),

Present Value Function Formula


Cash flow $900 $567.15 $567.15
Rate 8%
Periods 6

2) You invest $20,000 in a retirement account and expect to earn a 10% annual return. How much do you expect to be in the

Future value Function Formula


PV $20,000 134549.99899 $134,550.00
rate 10%
periods 20

3) You have entered into a contract that promises $1,000 per year for the next 10 years, with the first payment being made

Annuity

Cash flow payment $1,000 Function Formula


rate 6% $7,360.09 $7,360.09
periods 10

4) You just purchased a share of stock at a cost of $25. You expect the stock to pay you a dividend at the end of this year of

purchase price $ 25.00 Return expected profit Expected Return


dividend $ 1.75 $ 29.25 $ 4.25 17.00%
future security
price $ 27.50

5) You are planning for your retirement and will be investing $250/month into an IRA. You expect a monthly return of 1% an

payment/month $ 250.00 Present Value Retirement Amount


monthly rate 1% $24,884.02 $5,363,673.26

period, 45*12 540

6) An Admiralty Bond promises a payment of $50/year, forever. Assuming the first payment is expected one year from
Payment due Payment due immediately
Perpetuity in one year
cash flow 50 1000 1050
rate 5%

7) What is the effective annual rate of an investment that has a 12% APR that compounds at each of the following frequenc

Annual
Percentage Semi-
Rate Annual Rate Annually Quarterly Monthly
12% 12% 6% 3% 1%
$112.00 $112.36 $112.55 $112.68
12% 12.36% 12.55% 12.68%
PR, compounded annually), what is a fair price for this expected future cash flow today?

0 1 2 3 4 5
0 0 0 0 0 0
Present Value

h do you expect to be in the account after 20 years?

0 1 2 3 4 5
$134,550 0 0 0 0 0
Future Value

e first payment being made one year from today. Assuming a discount rate of 6%, what is a fair price for this contract today?

0 1 2 3 4 5
Present Value 7360.087 1000 1000 1000 1000 1000
943.3962 889.9964 839.6193 792.0937 747.2581729

d at the end of this year of $1.75 and the price of the security  after the dividend is paid to be $27.50. Given this information, what is yo

ct a monthly return of 1% and are 45 years from your expected retirement date. Given this information, how much do you expect to be

is expected one year from today and that an appropriate yield is 5%, what is a fair price for this bond? Alternatively, assume that the fi
Note**
To cover the first payment that starts immediately,
the value of the Admiralty Bond would increase by $50

h of the following frequencies: Annually, Semi-Annually, Quarterly, Monthly, Continuously.

Continuously
infinite or "e"
12.741573961
12.74%
6
900
$567

6 7 8 9 10 11 12 13 14 15
0 0 0 0 0 0 0 0 0 0
$134,550

contract today?

6 7 8 9 10
1000 1000 1000 1000 1000
704.9605 665.0571 627.4124 591.8985 $558.39

this information, what is your expected annual return on this investment?

w much do you expect to be in your retirement account when you retire?

rnatively, assume that the first payment is expected immediately. How does the price of this bond change?
16 17 18 19 20
0 0 0 0 0

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