Assume That You Are Nearing Graduation And Have Appli 281388

Assume That You Are Nearing Graduation And Have Applied For a Job With

Assume that you are nearing graduation and have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an examination that covers several financial analysis techniques. The first section of the test addresses time value of money analysis. See how you would do by answering the following questions. Draw time lines for (a) a $2000 lump sum cash flow at the end of year 4, (b) an ordinary annuity of $1000 per year for 5 years, and (c) an uneven cash flow stream of -$450, $1000, $650, $850 and $500 at the end of years 0 through 4.

What is the future value of an initial $1000 after 5 years if it is invested in an account paying 5% annual interest? What is the present value of $1000 to be received in 4 years if the appropriate interest rate is 5%? We sometimes need to find out how long it will take a sum of money (or anything else) to grow to some specified amount. For example, if a company's sales for 2020 is $1000 and expected to grow at a rate of 10% per year, how long will it take sales to double? If you invested $10,000 in an investment account and you expect it to double in 4 years, what interest rate must it earn?

What is the future value of a 5-year ordinary annuity of $1000 if the appropriate interest rate is 5%? What is the present value of the annuity? What is the future value of $1000 after 4 years under 10% annual compounding? Semiannual compounding? Quarterly compounding? Monthly compounding? Daily compounding? What is the effective annual rate (EAR or EFF%)? What is the EFF% for a nominal rate of 5%, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily? Construct an amortization schedule for a $1,000, 12% annual rate loan with 4 equal installments. What is the annual interest expense for the borrower, and the annual interest income for the lender, during Year 2? Suppose on January 1 you deposit $1000 in an account that pays a nominal, or quoted, interest rate of 12%, with interest added (compounded) daily. How much will you have in your account on October 1, or 9 months later?

You want to buy a car, and a local bank will lend you $10,000. The loan would be fully amortized over 6 years (72 months), and the nominal interest rate would be 10%, with interest paid monthly. What is the monthly loan payment? While Mary Corens was a student at the University of Tennessee, she borrowed $20,000 in student loans at an annual interest rate of 5%. If Mary repays $200 per year, then how long (to the nearest year) will it take her to repay the loan?

Question 2 1. Jackson Corporation’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%. The bonds have a yield to maturity of 10%. What is the current market price of these bonds?

2. Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 10 years, have a face value of $1,000, and a yield to maturity of 9%. What is the price of the bonds? 3.

Wilson Wonders’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $900. What is their yield to maturity? 4.

Heath Foods’s bonds have 10 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 9%. They pay interest annually and have a 10% coupon rate. What is their current yield? 5.

Suppose Hillard Manufacturing sold an issue of bonds with a 12-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 5%. At what price would the bonds sell? Suppose that 2 years after the initial offering, the going interest rate had risen to 11%. At what price would the bonds sell? Suppose that 2 years after the issue date (as in part a) interest rates fell to 5%. Suppose further that the interest rate remained at 5% for the next 10 years. What would happen to the price of the bonds over time?

Paper For Above instruction

The fascinating domain of financial analysis offers a comprehensive set of tools and techniques pivotal for effective money management and investment decision-making. In this paper, we delve into critical concepts such as the time value of money, bond valuation, annuities, compound interest, and amortization schedules, which are foundational for both individual financial planning and corporate finance strategies.

Initially, understanding the time value of money is crucial. Consider a lump sum of $2,000 paid at the end of Year 4, which can be represented via a time line illustrating the cash flow occurring four years from now. Similarly, an ordinary annuity of $1,000 paid annually for five years involves a series of equal payments, which can be depicted over a timeline spanning five periods with payments occurring at the end of each period. An uneven cash flow stream, such as -$450 at Year 0, followed by $1,000 at Year 1, $650 at Year 2, $850 at Year 3, and $500 at Year 4, demonstrates the variability of cash flows across different periods, critical for present and future value calculations.

The future value (FV) of an initial $1,000 investment after five years at a 5% annual interest rate can be calculated using the formula FV = PV × (1 + r)^n, resulting in $1,276.28. Conversely, the present value (PV) of $1,000 to be received in four years at a 5% rate uses PV = FV / (1 + r)^n, equating to approximately $814.51, highlighting the importance of discounting future cash flows.

Understanding how long it takes for an investment to grow to a specific amount involves solving for time using Ln (natural logarithm). For example, if a company's sales of $1,000 are expected to grow at 10% annually, it will double in roughly 7.27 years, derived from Ln(2) / Ln(1 + 0.10). To double $10,000 in four years, an interest rate of approximately 18.92% is necessary, computed via the formula r = (FV/PV)^{1/n} - 1.

The valuation of ordinary annuities presents the future value as FV = P × [(1 + r)^n - 1] / r and the present value as PV = P × [1 - (1 + r)^-n] / r, where P is the payment, r is the interest rate per period, and n is the number of periods. For example, a 5-year ordinary annuity of $1,000 at 5% accrues a future value of approximately $5,525.63, and a present value of about $4,329.48.

Interest compounding frequency significantly impacts future and present values. Under 10% annual interest, compounding quarterly results in a higher effective rate and accumulated amount compared to annual or semiannual compounding. The effective annual rate (EAR), computed as EAR = (1 + nominal / n)^n - 1, demonstrates this difference, with higher n leading to a higher EAR.

Amortization schedules illustrate how loan payments are divided into interest and principal components over time. A $1,000 loan at 12% annual interest, amortized over four equal payments, results in decreasing interest expense over time, with Year 2 interest calculated using the remaining principal balance. Similarly, monthly mortgage payments for a $10,000 loan at 10% interest over six years involve computing the monthly installment using standard amortization formulas.

Investments compounded daily, such as depositing $1,000 at 12% nominal interest, accrue significant interest over nine months, illustrating the power of frequent compounding. The precise future account balance depends on the number of compounding periods, highlighting differences among daily, monthly, quarterly, and annual compounding.

Loan repayment schedules and bond valuation are fundamental in assessing debt obligations and investment profitability. For instance, the market price of Jackson Corporation’s bonds can be determined by discounting the future coupon payments and face value at the yield to maturity, utilizing present value formulas. The same principle applies for bonds issued by Renfro Rentals with semiannual coupons, where the present value of future cash flows reflects their current market price.

Bond yields to maturity (YTM) are calculated by solving for the discount rate that equates present value to current market price. For Wilson Wonders’s bonds selling at $900, the YTM is higher than the coupon rate, which can be estimated through iterative methods or financial calculators. Current yield, used for Heath Foods’s bonds, is simply annual coupon payment divided by current market price.

The relationship between bond prices and interest rate changes is evident. When interest rates fall, bond prices increase, and vice versa. As in the case of Hillard Manufacturing’s bonds, bond prices fluctuate based on market interest rates, with price sensitivity growing as bonds approach maturity. The inverse relationship underscores the importance of interest rate environment in bond investing strategies.

Overall, mastering these financial concepts equips individuals and organizations with robust tools to make informed investment, borrowing, and financial planning decisions, essential in today's dynamic economic landscape.

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