Introduction to Finance HW#3

  1. (40 points) Solve the following problems using Excel spreadsheet (Excel templates can be found on Canvas under “AssignmentsàHW3àHW3 Excel Template.”) Also, please show how to use math formulas to solve the questions. But you are not required to calculate the numerical results manually based on the formulas.

 

    1. If the appropriate discount rate for the following cash flows is 9.75% per year, what is the present value of the cash flows? (8 points)

 

Year Cash Flow
1 $2,800
2 0
3 8,100
4 1,940

 

  1. You are to make monthly deposits of $150 into a retirement account that pays 11 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 20 years? (8 points)

 

  1. Beginning three months from now, you want to be able to withdraw $1,200 each quarter from your bank account to cover college expenses over the next four years. If the account pays 0.50 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years? (8 points)

 

  1. You want to be a millionaire when you retire in 40 years. How much do you have to save each month if you can earn a 10 percent annual return? (8 points)

 

  1. While Steve was a college student, he borrowed $12,000 in student loans at an annual interest rate of 9 percent. If Steve repays $1,500 per year, how long will it take him to repay the loan? (8 points)

 

  1. (20 points) Solve the following problems using Excel spreadsheet (Excel templates can be found on Canvas under “AssignmentsàHW3àHW3 Excel Template.”) 

 

    1. You are looking at a bond that has 20 years to maturity. The coupon rate is 9% and coupons are paid semiannually. The yield-to-maturity is 7%. What is the current price? Is it a premium bond or a discount bond?

 

    1. You are looking at a bond that has 30 years to maturity. The coupon rate is 8% and coupons are paid semiannually. The current price is $950. What is the yield to maturity? Is it a premium bond or a discount bond?

 

  1.  (10 points) The Northwest Athletic Equipment Company has undergone tremendous growth over the past several years.  Things are slowing now but they still anticipate a 3% annual rate in the growth of dividends per year indefinitely.  If the market requires a 14% rate of return on comparable securities, and Northwest Athletic currently pays an annual dividend of $.50 per share, estimate a current per share price of the stock.

 

  1. (30 points) Complete “Homework #3: 30%” on MyFinanceLab under the “Assignments” tab. You may try each question up to three times.