Week 2 Discussion 2 Present And Future Values And Expected R

Week 2 Discussion 2 Present And Future Values And Expected Returnes

Week 2, Discussion 2: Present and Future Values, and Expected Returnes Go to the Yahoo Finance Bonds Center. 1. Under: Features / BOND LOOKUP / Find Bonds by Name. 2. Type in the first letter of your last name. 3. Under “Type” choose one of the “Corp” Bonds. Assume interest rates for bonds today is 5% for an AAA rated bond. Calculate the price of the bond you have selected relative to the 5%. Is the bond selling at a premium or a discount? Why? Be sure to show how you arrived at your answer. What other factors may influence the value of a bond? Imagine that you have decided you need a new car, but not any car will do; you have decided to purchase the car of your dreams. Conduct some research as to the cost of this car. You have determined in this imagined scenario that you could afford to make a 10% down payment. You can borrow the balance either from your local bank using a four-year loan or from the dealership’s finance company. If you purchase from your dealership’s finance company, the APR will be 10% with your 10% down and monthly payments over three years. However, the dealership will give you a rebate of 5% of the car price after the three year term is complete. You want the best deal possible, so you consider the following questions: · What type of car have you selected, and what will it cost? · What is the interest rate from your local bank for a car loan for four years? · What will your payment be to your local bank, assuming your 10% down payment? Be sure to use the formula provided in Chapter 4 and show your work. How much will that car have cost in four years? · What will your payment be to the dealership finance company assuming your 10% down payment? Be sure to use the formula provided in Chapter 4 and show your work. How much will that car have cost in 3 years? · Which is the better deal and why?

Paper For Above instruction

The discussion revolves around understanding bonds, their pricing, and evaluating different financing options for purchasing a car of one's dreams. To analyze bond prices, an understanding of present value calculations and market interest rates is essential. The second part involves comparing two financing options—bank loan versus dealership financing—and calculating the total cost over the specified periods, accounting for interest, payments, and rebates to determine the most economical choice.

Bond Valuation and Market Pricing

Using Yahoo Finance's Bond Center, select a corporate bond based on the first letter of one's last name. Assume an AAA-rated bond with a market interest rate of 5%. To calculate the bond’s price, we utilize the present value formula for bonds:

PV = C × [1 - (1 + r)^-n] / r + Face Value / (1 + r)^n

Where PV is the bond price, C is the semiannual coupon payment, r is the semiannual market interest rate, and n is the total number of semiannual periods.

For a typical AAA bond, assume a face value of $1,000, a coupon rate of 5% annually (2.5% semiannually), and n = years × 2. If the bond’s coupon payments and face value are known, the bond's price can be calculated directly. The bond's price relative to its face value indicates whether it is selling at a premium (above face value) or discount (below face value). A bond selling at a premium suggests the coupon rate is higher than the current market rate or other market factors incentivize higher prices; at a discount, the opposite is true. Market interest rates, credit ratings, and macroeconomic factors influence bond valuations.

Car Purchase Financing Analysis

Suppose the selected car costs $30,000. With a 10% down payment of $3,000, the financed amount is $27,000. The options include a four-year bank loan at an interest rate of, say, 4% APR, and a three-year dealership finance plan at 10% APR with a rebate of 5% after three years.

To compute the monthly payments for the bank loan, we use the amortization formula:

PMT = [P × r × (1 + r)^n] / [(1 + r)^n - 1]

Where P is the principal ($27,000), r is the monthly interest rate (annual rate / 12), and n is total months (4 years × 12 = 48). Plugging in the numbers:

r = 0.04 / 12 ≈ 0.00333, n = 48

PMT = [27,000 × 0.00333 × (1 + 0.00333)^48] / [(1 + 0.00333)^48 - 1]

Calculating this yields the monthly payment. The total cost over four years includes all payments, and summing these provides the total amount paid, which should be compared to the residual value after accounting for interest.

For the dealership finance plan, with a 10% APR and three-year term, the monthly payment is calculated similarly, with n = 36 months. After three years, the rebate of 5% of the original price ($1,500) reduces the net cost. To evaluate which option is better, compare the total payments made in each scenario, factoring in rebates, interest paid, and the residual value.

Conclusion

The financial analysis indicates that the bank loan, with its lower interest rate, potentially results in a lower total cost over the respective periods. However, detailed calculations incorporating exact financing terms, monthly payments, and rebate effects are necessary for an accurate comparison. The choice ultimately depends on the total cost incurred, the impact of rebates, and personal financial preferences regarding loan duration and flexibility.

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
• Ehrhardt, M. C., & Brigham, E. F. (2019). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
• Fabozzi, F. J. (2021). Bond Markets, Analysis, and Strategies (10th ed.). Pearson.
• Investopedia. (2023). Bond Pricing. Retrieved from https://www.investopedia.com/terms/b/bondpricing.asp
• Yahoo Finance. (2023). Bonds Center. Retrieved from https://finance.yahoo.com/bonds
• Damodaran, A. (2017). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley.
• Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2021). Corporate Finance (12th ed.). McGraw-Hill Education.
• Meigs, F. R., & Meigs, R. F. (2018). Financial Accounting (10th ed.). McGraw-Hill Education.
• Federal Reserve Bank of St. Louis. (2023). Loan interest rates and economic indicators. Retrieved from https://fred.stlouisfed.org