BBA 3301 Financial Management 1 Course Learning Outcomes ✓ Solved

BBA 3301, Financial Management 1 Course Learning Outcomes

Upon completion of this unit, students should be able to:

  1. Apply time value of money techniques to various valuation and budgeting problems.
  3. Calculate the annual payment on a loan using the present value of an annuity.
  4. Use discounting to determine the present value of an annuity.
  5. Calculate the future value of an annuity and periodic annuity payments.
  6. Evaluate stock and bond valuation.
  8. Determine the present value of a bond.

Paper For Above Instructions

Financial management is a crucial aspect for individuals and organizations, particularly in understanding the time value of money (TVM) and the valuation of stocks and bonds. This paper will address the assignment questions related to the time value of money and bond evaluations based on the given unit's learning outcomes.

1. Evaluating Annual Payment on a Loan

Your supervisor has tasked you with evaluating several loans related to a new expansion project. Using the Present Value Interest Factor of Annuity (PVIFA) table, we need to determine the annual payment for a loan of $400,000 at an interest rate of 8%, amortized over five years.

The formula for the annual payment (PMT) is given by:

PMT = Pmt * { [r(1 + r)^n] / [(1 + r)^n - 1] }

Where:

  • Pmt = Present value = $400,000
  • r = Interest rate = 0.08
  • n = Number of periods = 5 years

Using the PVIFA table or financial calculator, we find that the PVIFA for 8% over 5 years is approximately 3.9927.

Thus, substituting into the formula results in:

PMT = $400,000 / 3.9927 = $100,067.67.

This payment appears reasonable as it aligns with typical loan requirements, which are influenced by the interest rates and amortization periods. A greater understanding of items like this enhances your ability to manage financial obligations effectively.

2. Mortgage Payment Calculations

Dan is considering borrowing $500,000 for a condo. We’ll evaluate two scenarios based on 8% fixed-rate mortgage loans.

2a. Monthly Payment for a 30-Year Mortgage

To find the monthly payment for a 30-year loan, we use the formula:

PMT = Pmt * [r / (1 - (1 + r)^-n)]

Where:

  • Pmt = $500,000
  • r = 0.08 / 12 = 0.00667
  • n = 30 * 12 = 360 months

Calculating, we find:

PMT = $500,000 * [0.00667 / (1 - (1 + 0.00667)^-360)] = $3,688.64.

2b. Monthly Payment for a 15-Year Mortgage

Now, for a 15-year period:

n = 15 * 12 = 180 months.

PMT = $500,000 * [0.00667 / (1 - (1 + 0.00667)^-180)] = $4,598.10.

2c. Influence of Smaller Loan Period

A smaller loan period results in higher monthly payments but lowers the overall interest paid over the loan's lifespan. This indicates that while the monthly burden might be higher, the total cost of borrowing is lower, which is favorable for financial efficiency.

3. Saving for Retirement

Melanie's goal is to save $600,000 over 20 years, discounting at 11%.

3a. Present Value Calculation

To find the present value (PV) of this future goal, we use the formula:

PV = FV / (1 + r)^n.

Substituting in:

PV = $600,000 / (1 + 0.11)^20 = $600,000 / 7.423 = $80,811.36.

3b. PV for 15-Year Period

Now for 15 years:

PV = $600,000 / (1 + 0.11)^15 = $600,000 / 5.148 = $116,250.53.

This shows a significant impact due to the shorter time period, emphasizing the importance of starting savings early. The longer funds can grow, the less one needs to invest today to reach a future financial goal.

4. Future Value of Annuity

Anne plans to invest $400 annually at a 6% interest rate for four years.

4a. Future Value of Annuity Due

For an annuity due, FV can be calculated as:

FV = P [(1 + r)^n - 1] / r (1+r).

Substituting:

FV = $400 [(1 + 0.06)^4 - 1] / 0.06 (1+0.06) = $400 [1.2625 - 1] / 0.06 1.06 = $400 * 4.216 = $1,686.61.

4b. Difference Between Annuity Due and Ordinary Annuity

An annuity due assumes payments are made at the beginning of each period while an ordinary annuity assumes payments are made at the end. Thus, an annuity due generally has a higher future value due to the earlier compounding effect.

5. Bond Valuation

Jimmy has a bond with a face value of $1,000 and a coupon rate of 9.5%, paid semiannually over five years.

5a. Present Value of the Bond

Using the semiannual coupon payment:

C = (0.095 * $1,000)/2 = $47.50.

PV = C * [1 - (1 + r)^-n] / r + F / (1 + r)^n.

Where, r = 0.14/2 = 0.07 and n = 5*2 = 10.

PV = $47.50 * [1 - (1 + 0.07)^-10] / 0.07 + $1,000 / (1 + 0.07)^10 = $674.68.

5b. Impact of Paying Interest Semi-Annually

Paying semi-annually increases the effective return for investors as it allows for more frequent compounding of interest, thus increasing the investor's earnings over time.

Conclusion

Understanding the time value of money and the evaluation of stocks and bonds is vital for making informed financial decisions. From loan evaluations to bond valuation and retirement planning, these concepts play a crucial role in effective financial management.

References

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  • Maxwell, W. F., & Stephens, C. P. (2003). The wealth effects of repurchases on bondholders. The Journal of Finance, 58(2), 895–919.
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  • Graham, B., & Dodd, D. L. (2009). Security Analysis: Sixth Edition. McGraw-Hill Education.

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