**FIN 534 Week 4 Homework Assignment 2**

$ 12.00

Directions: Answer the following questions on a separate document. Explain how you reached the answer |

or show your work if a mathematical calculation is needed, or both. Submit your assignment using the |

assignment link in the course shell. This homework assignment is worth 100 points. |

Use the following information for Questions 1 through 5: |

Assume that you are nearing graduation and have applied for a job with a local bank. The bank’s |

evaluation process requires you to take an examination that covers several financial analysis techniques. |

The first section of the test asks you to address these discounted cash flow analysis problems: |

1. 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. |

2. 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? |

3. 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? |

4. What is the effective annual rate (EAR or EFF%) for a nominal rate of 12%, compounded |

semiannually? Compounded quarterly? Compounded monthly? Compounded daily? |

5. 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? |

Use the following information for Questions 6 and 7: |

A firm issues a 10-year, $1,000 par value bond with a 10% annual coupon and a required rate of return is |

10%. |

6. 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? |

7. What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a |

premium or a discount bond? |

8. 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 rd and the bond’s coupon rate? |

9. 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.) |

**Category:**Business, General Business

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