# FIN 534 Week 4 Homework

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FIN 534 Week 4 Homework

Fin534 Financial Management

- What is the present value of the following uneven cash flow stream − $50, $100, $75, and $50 at the end of Years 0 through 3? The appropriate interest rate is 10%, compounded annually
- We sometimes need to find out how long it will take a sum of money (or something else, such as earnings, population, or prices) to grow to some specified amount. For example, if a company’s sales are growing at a rate of 20% per year, how long will it take sales to double?
- Will the future value be larger or smaller if we compound an initial amount more often than annually — for example, every 6 months, or semiannually—holding the stated interest rate constant? Why?
- What is the effective annual rate (EAR or EFF%) for a nominal rate of 12%, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily?

- Suppose that on January 1 you deposit $100 in an account that pays a nominal (or quoted) interest rate of 11.33463%, with interest added (compounded) daily. How much will you have in your account on October 1, or 9 months later?
- What would be the value of the bond described above if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 % return? Would we now have a discount or a premium bond?

- What would happen to the bond’s value if inflation fell and declined to 7%? Would we now have a premium or a discount bond?
- What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887.00? That sells for $1,134.20? What does a bond selling at a discount or at a premium tell you about the relationship between and the bond’s coupon rate?
- What are the total return, the current yield, and the capital gains yield for the discount bond in Question #8 at $887.00? At $1,134.20? (Assume the bond is held to maturity and the company does not default on the bond.)