Finance 312 Coursework
FIN 312 01W
Assignment #1 (Chapters 3 and 4) – 10 problems:
Due 9/9/13
Chapter 3
Questions (p62): 2
2. If there is a decline in interest rates, which would you rather be holding, long term bonds or short-term bonds? Why? Which type of bond has greater interest rate risk?
Long term bonds because their price would increase more than the price of the short term bonds, ultimately producing a better return on investment while rates are declining. However, the long term bond increases your interest rate risk because as history has shown, markets can fluctuate wildly, an increase in rates would certainly hurt the long term bond holders more.
Quant Problems (p62) 2, 3, 4, 9
2. A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%.
Solution: A lottery payment functions like an annuity, it can be paid over time or taken all at once, lottery winnings can be sold to investors for winners that decide to convert their payments in to a lump sum. This ends up being a present value problem like discussed on page 37.
Using my new financial calculator App I entered the following:
N =20; PMT =500,000; FV =0; I =6%; Compute PV =$6,079,058.25
To break it down not using a calculator take 500,000 /.06, + 500,000 immediate payout, = 1 payment + .06 x 19 = 500,000 + 8,333,333.33 – 2,754,275.09 = $6,079,058.25
It isn’t ten million, but I’ll take it!!
3. Consider a bond with a 7% annual coupon and a face value of $1,000. Complete the following table:
On page 39 and 40 we are given an example of a bond with a coupon rate of 10%. It pays you 100 per year for ten years and the final payment will be 1100 when it pays back its face value. Using this same formula the bond in this problem will pay 70 per year, and then we figure out the years to maturity vs the yield to maturity to establish current
Assignment #1 (Chapters 3 and 4) – 10 problems:
Due 9/9/13
Chapter 3
Questions (p62): 2
2. If there is a decline in interest rates, which would you rather be holding, long term bonds or short-term bonds? Why? Which type of bond has greater interest rate risk?
Long term bonds because their price would increase more than the price of the short term bonds, ultimately producing a better return on investment while rates are declining. However, the long term bond increases your interest rate risk because as history has shown, markets can fluctuate wildly, an increase in rates would certainly hurt the long term bond holders more.
Quant Problems (p62) 2, 3, 4, 9
2. A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%.
Solution: A lottery payment functions like an annuity, it can be paid over time or taken all at once, lottery winnings can be sold to investors for winners that decide to convert their payments in to a lump sum. This ends up being a present value problem like discussed on page 37.
Using my new financial calculator App I entered the following:
N =20; PMT =500,000; FV =0; I =6%; Compute PV =$6,079,058.25
To break it down not using a calculator take 500,000 /.06, + 500,000 immediate payout, = 1 payment + .06 x 19 = 500,000 + 8,333,333.33 – 2,754,275.09 = $6,079,058.25
It isn’t ten million, but I’ll take it!!
3. Consider a bond with a 7% annual coupon and a face value of $1,000. Complete the following table:
On page 39 and 40 we are given an example of a bond with a coupon rate of 10%. It pays you 100 per year for ten years and the final payment will be 1100 when it pays back its face value. Using this same formula the bond in this problem will pay 70 per year, and then we figure out the years to maturity vs the yield to maturity to establish current