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ASSIGNMENT I (Date of Submission – 30th August 2018)

Structure of the assignment (Each and every questions have the following steps)
I. Given data’s
II. Formula
III. Line Diagram
IV. Calculations
V. Result
VI. Comments (Min 2 to 3 lines)

1. Your grandfather put some money in an account for you on the day you were born. You
are now 18 years old and are allowed to withdraw the money for the first time. The
account currently has $3996 in it and pays an 8% interest rate.
i. How much money would be in the account if you left the money there until your
25th birthday?

FVn= $V * (1+R)n
R:0,08

Present: $3996 n: 7 years Future: ?

FVn= $3996 * (1+0,08)7= 6848.44

If the money is left in the account until “my” 25 th birthday, which means 7 years in the future,
the account will have $6848.44 with an 8% interest rate.

ii. What if you left the money until your 65th birthday?

FVn= $V * (1+R)n
R:0,08

Present: $3996 n: 47 years Future:?

FVn= $3996 * (1+0,08)47= 148779.12

If the money is left in the account until “my” 65 th birthday, which means 47 years in the
future, the account will have $14779.12 with an 8% interest rate.

iii. How much money did your grandfather originally put in the account?

V= FVn / (1+R)n
R:0,08

Present: ? n: 18 years Future:


$3996

V= $3996 / (1+0,08)18= 999.99

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The result shows that “my grandfather” did put 18 years ago in the account $999.99 as
original investment with an interest rate of 8%.

2. You have just received a windfall from an investment you made in a friend’s business. He
will be paying you $10,000 at the end of this year, $20,000 at the end of the following
year, and $30,000 at the end of the year after that (three years from today). The interest
rate is 3.5% per year.
i. What is the present value of your windfall?

V= FVn / (1+R)n

R:3.5% per year.

Present: ? First year: $10,000 Second year: $20,000 Third year: $30,000

n: 3 years

V= $10,000 / (1+3.5%)1 = 9661.83 +


V= $20,000 / (1+3.5%)2 = 18670.21 + Total: 55390.32
V= $30,000 / (1+3.5%)3 = 27058.28 =

Each year is a future that need find their present. When present is found each result is added
and the total is the present value of the windfall (55390.32).

ii. What is the future value of your windfall in three years (on the date of the last
payment)?

FVn= $V * (1+R)n

R:3,5% per year

Present: $55390 n: 3 years Future:?


FVn= 55390*(1+3.5%)3= 61411.88

The future value of the windfall in three years is 61411.88. This represent the money in 3
years that friend’s business will be pay “me”

3. Calculating the duration on a $ 1000 Ten years 10% Coupon Bond when is interest rates
is 20%.

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4. We consider the following zero-coupon curve:
Maturity (Years) Zero – Coupon Rate (%)
1 4.00
2 4.50
3 4.75
4 4.90
5 5.00

A. What is the price of a 5-year bond with a $100 face value, which delivers a 5%
annual coupon rate?
B. We suppose that the zero-coupon curve increases instantaneously and uniformly
by 0.5%. What is the new price and the new yield to maturity of the bond?

5. Suppose you are trying to calculate duration on a $1000 principle with 10 years 12%
coupon bond when current interest rate is 15%.

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6. 20 year zero coupon with YTM of 8% and M = 1000. Imputed interest income in first,
second, third, fourth and last year of bond’s life?

Year Until Maturity Const. Yield Value Imputed Interest


t=0 20 1000/(1+0.08)20= 214.55 -
t=1 19 1000/(1+0.08)19= 231.71 231.71-214.55= 17.16
t=2 18 1000/(1+0.08)18= 250.23 250.23-231.71= 18.52
t=19 1 1000/(1+0.08)= 925.93 -
T=20 0 1000 74.07

7. What is the present value of receiving a single amount of $10,000 and $20, 0000 at the
end of five years, if the time value of money is 6% per year, compounded semiannually?

V= e-RnFVn

V=e-(0.06)(1)*10,000= 9417.64

V=e-(0.06)(5)*20,000= 14816.36
8. Suppose Mary gets a good job and vows to invest $100 at the end of each year in an
account that pays 4% interest annually. How much would this investment grow to after
three years? After four years?

FV= $V*(1+R)n

FV= 100(1+0.04)1= 104

FV= 100(1+0.04)3= 112.48

9. What is the balance in an account at the end of 10 years if $2,500 is deposited today and
the account earns 4% interest, compounded annually? Semiannually? Three months?
Quarterly? Monthly? Weekly and daily?

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10. A company is considering starting a new product line. The new product line requires the
installation of new machines and equipment. For this purpose, company wants to borrow
money by issuing bonds of $10,000 for 12-year period. The interest is to be paid at a rate
of 8% per year.
Required: Compute the amount of interest to be paid to bondholders over 12-year period:
i. If simple interest is charged.
ii. If the interest is compounded annually.

11. Charlie has been given R 5000 for his sixteenth birthday. Rather than spending it, he has
decided to invest it so that he can put down a deposit of R 10 000 on a car on his
eighteenth birthday. What compound interest rate does he need to achieve this growth?
Comment on your answer.

12. Now the pension has the option to hold a ten – year coupon bond with a coupon rate of
20% instead of 10%. As mentioned earlier, the duration for this 20% coupon bond is 5.98
years when the interest rate is 10%. Find the approximate change in the bond price when
the interest rate increases from 10% to 11%. (Assume - Duration – 5.98).

13. Find compound interest on Rs.2500 invested at 6% per annually, compound semi-
annually for 8 years.

14. If you deposit $4000 into an account paying 6% annual interest compounded quarterly,


how much money will be in the account after 5 years? 

15.  If you deposit $6500 into an account paying 8% annual interest compounded monthly,


how much money will be in the account after 7 years? 

16. How much money would you need to deposit today at 9% annual interest


compounded monthly to have $12000 in the account after 6 years?

17. If you have a bank account whose principal = $1000, and your bank compounds the
interest twice a year at an interest rate of 5%, how much money do you have in your
account at the year's end?

18. If you start a bank account with $10,000 and your bank compounds the interest quarterly
at an interest rate of 8%, how much money do you have at the year's end? (assume that
you do not add or withdraw any money from the account)

19. Doug opened a savings account and deposited $100.00 as principal. The account earns
8% interest, compounded annually. What is the balance after 7 years?

20. Find the compound amount and compound interest on the principal 20,000 borrowed at
6% compounded annually for 3 years.
21. Consider a one-month investment in Nokia. Suppose you buy the stock in month t-1 at Pt-
1 = $180 and sell the stock the next month for Pt = $256 Further assume that Nokia does
not pay a dividend between months t − 1 and t.

22. Continuing with the previous example, suppose that the price of Microsoft stock in
months t – 2 is $ 165 and no dividend is paid between months t – 2 and t.

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23. Consider a portfolio of google and Samsung stock in which you initially purchase ten
shares of each stock at the month t – 1 at the prices and t is
PGoogle ,t−1 =$ 258 , P Sams ,t−1 =$156
PGoogle ,t =$348 , PSams ,t =$170 respectively.

24. Consider a one – month investment in Nokia. Suppose you buy the stock month t-1 at Pt-
1 = $180 and sell the stock the next month for Pt = $256. Further, assume that Microsoft
pays a $5 dividend between month’s t-1 and t. Compute capital gain, dividend yield and
total return.

25. Consider, again, a one-month investment in Nokia. Suppose the CPI in months t − 1 and t
is 1 and 1.05respectively, representing a 5% monthly growth rate in the overall price
level. Compute the real prices of Nokia.

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