Fin 439 Case 92
QUESTIONS
1. Assume that you are given a set of cash flows on a time line and asked to find their present value. How would you choose the discount rate to apply to these cash flows?
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2. Consider a one-year, $18,000 CD.
a. What is its value at maturity if it pays 8.4 percent (annual) interest?
b. Compute the future value if the CD pays 3.2 percent; if it pays 16.8 percent. Overall, what do these results indicate about the relation between level of interest and future value? c. The First National Bank of San Francisco offers CDs with an 8.4 percent nominal (stated) interest rate but compounded semiannually. What is the effective annual rate on such a
CD? What is the value of the CD at the end of the year? Explain the difference between this CD and the annual interest CD.
d. Pacific Trust offers 8.4 percent annual interest CDs with quarterly compounding while
Bay State Savings and Loan offers the same rate with daily compounding. What are the effective annual rates and values at maturity of these CDs? (Use a 365-day year.) Overall, what do these results indicate about the relation between the frequency of compounding and future value?
e. What nominal rate would the First National Bank have to offer to make its semiannual compounding CD competitive with Bay State Savings and Loan’s daily compounding
CD?
Question 3
Now consider a 6-year CD. Rework the computations in parts a through d of Question 2 using a 6-year ending date. Explain the differences in these results with those found in Question 2.
a. What is its value at maturity if it pays 8.4 percent (annual) interest?
b. Compute the future value if the CD pays 3.2 percent; if it pays 16.8 percent.
c. The First National Bank of San Francisco offers CDs with an 8.4 percent nominal (stated) interest rate but compounded semiannually. What is the effective annual rate on such a CD? What is the value of the CD at the end of the year?
d. Pacific Trust offers 8.4 percent
1. Assume that you are given a set of cash flows on a time line and asked to find their present value. How would you choose the discount rate to apply to these cash flows?
abcdefg
2. Consider a one-year, $18,000 CD.
a. What is its value at maturity if it pays 8.4 percent (annual) interest?
b. Compute the future value if the CD pays 3.2 percent; if it pays 16.8 percent. Overall, what do these results indicate about the relation between level of interest and future value? c. The First National Bank of San Francisco offers CDs with an 8.4 percent nominal (stated) interest rate but compounded semiannually. What is the effective annual rate on such a
CD? What is the value of the CD at the end of the year? Explain the difference between this CD and the annual interest CD.
d. Pacific Trust offers 8.4 percent annual interest CDs with quarterly compounding while
Bay State Savings and Loan offers the same rate with daily compounding. What are the effective annual rates and values at maturity of these CDs? (Use a 365-day year.) Overall, what do these results indicate about the relation between the frequency of compounding and future value?
e. What nominal rate would the First National Bank have to offer to make its semiannual compounding CD competitive with Bay State Savings and Loan’s daily compounding
CD?
Question 3
Now consider a 6-year CD. Rework the computations in parts a through d of Question 2 using a 6-year ending date. Explain the differences in these results with those found in Question 2.
a. What is its value at maturity if it pays 8.4 percent (annual) interest?
b. Compute the future value if the CD pays 3.2 percent; if it pays 16.8 percent.
c. The First National Bank of San Francisco offers CDs with an 8.4 percent nominal (stated) interest rate but compounded semiannually. What is the effective annual rate on such a CD? What is the value of the CD at the end of the year?
d. Pacific Trust offers 8.4 percent