FIN201 quiz 1
if there is a coupon rate of 6% on a $1,000 bond, what is the annual interest payment?
$60 is the PMT
when valuing a standard fixed rate bond with a coupon of 6% and a maturity of 5 years where the coupon is paid annually and the principal of $1,000 of the bond is repaid to the holder at maturity, which of the following best describes the methodology used to value the bond?
-compute the PV value (annuity) of the annual coupon payments and add that to the PV of the principal which will be returned at maturity
if you finance a car and receive a loan, what will be the ending balance of the loan after you make your first payment? how do you figure this out
-first plug values into calc to find PMT -then do: initial PV price * interest rate = X -PMT - X = Y - initial PV - Y = answer -because if you make a payment its subtracted from the original amount, but you need to include how much money you're being saved by the interest rate (that is why you multiply the interest rate by the initial price and then subtract this price to find how much you're paying), then subtract what you're paying off by the initial price
which is the largest if the interest rate is 3%? -future value of 1,000 annuity for two years -future value of 1,000 after two years -present value of 1,000 after two years -present value of 1,000 annuity for two years
-future value of 1,000 annuity for two years
the future value of a dollar...
-increases with higher interest rates -increases with longer periods of time
the present value of an annuity...
-increases with longer periods of time -decreases with higher interest rates
steps to using a financial calculator for FV
-insert value for N then hit N -insert value for I/Y (don't change into decimal) then hit I/Y -insert value for PV (negative) then hit PV -hit CPT and then hit FV
what to remember when finding I/Y on a financial calculator
-make sure PV is negative and FV is positive -C/Y means how many times compounded per year (if its not one you need to change it)
the future value of a dollar section
...
you deposit $100 in a savings account that pays 5% annually, how much money will be in the account at the end of the year?
100 + 5 years of interest = principal after 1 100 + (.05 * 100) = principal after 1 year
current yield (CY) formula
CY = annual interest payment / price of bond
an investment will pay $1,000 annually for 7 years, the required rate of return is 12%. To estimate the value of this investment today, you will use future value of annuity method
F
if you show up at the sept. 28th career fair, your parents may promise to give you a choice of either $1,000 cash today or $1,500 cash at the end of three years; your required rate of return is 2.5%. to determine current value of the 1,500 cash, you will use a present value of annuity methodology
F
you will invest $2,500 annually for 10 years, not remove any of the funds until the end of year 10 and your rate of return will be 5%. To determine the value of investment at the end of the time period, you will use a PV of a dollar analysis
F
if you contribute _____ per year that value is your
PMT
what values go into financial calculator as negative values?
PMT and PV
how to calculate PV of a bond for the present year? how to calculate total value of the bond
PV at time T = coupon value / (1 + i ) to the T power calculate total value of the bond: add all the years together
bond prices and interest rates are inversely related
T
compounding refers to the earning of interest on interest
T
discounting refers to the process of bringing the future back to the present: T or F
T
your aunt has given you and your siblings each 5,000 today. your sibling has already spent the funds but you invest them in an account yielding 6.75% annually and will not remove any funds until the end of 2021. to determine the value of this investment in December 2021 assuming you earn 6.75 annually on the investment; the future value of a dollar methodology is used for the calculation
T
how to find current yield on a bond
annual interest / what you pay for the bond
when you are valuing what the 1,000 annually that your brother promises to deposit in your account for the next 5 years is worth at the end of 5 years, (assuming a rate of return of 3%), which methodology will you use?
future value of an annuity
MC: the time value of money suggests
individuals prefer a dollar in the present to a dollar in the future
the time value of money suggests...
individuals prefer a dollar in the present to a dollar in the future
how to find % of a coupon on a bond
interest annually / par -par is the maturity value or end value
required rate of return is another way to say
interest rate
semi annual for bonds -what variables change and how do they change
n * 2 pmt / 2 i / 2
what changes when value is compounded semi annually? monthly?
semi: n. = 2, i / 2, pmt / 2 monthly: n = 12, i / 12, pmt / 12
if you are making a payment as an annuity due...
the PV of your payments will be higher than that of an ordinary annuity
todays change in the stock market
went down
