Topic 3 In-Class Examples

TVM Application: Investment Valuation

3.1

A project requires an initial investment of $50,000. The project will generate net cash flows of $15,000 at the
end of the first year, $40,000 at the end of the second year, and $10,000 at the end of the third year. The
projects cost of capital is 13%. Calculate the projects NPV and IRR.

3.2

Project P requires an investment of 4,000 at time 0. The investment pays 2,000 at time 1 and 4,000 at time 2.
Project Q requires an investment of X at time 2. The investment pays 2,000 at time 0 and 4,000 at time 1.
The net present values of the two projects are equal at an interest rate of 10%. Calculate X.
(A)
(B)
(C)
(D)
(E)

5,400
5,420
5,440
5,460
5,480

Topic 3 Examples

[1]

TVM: Investment Valuation

3.3

Mike receives cash flows of 100 today, 200 in one year, and 100 in two years. The present value of these cash
flows is 364.46 at an annual effective rate of interest . Calculate .
(F)
(G)
(H)
(I)
(J)

3.4

A renter with $1,104 has a one year lease. The landlord is willing to accept two payment options:
(i) $1,104 now; or
(ii) $100 paid at the beginning of each month for twelve months.
What monthly interest rate would be required for the two options to be equivalent?
(A)
(B)
(C)
(D)
(E)

3.5

10%
11%
12%
13%
14%

Less than 0.012

At least 0.012 but less than 0.013
At least 0.013 but less than 0.014
At least 0.014 but less than 0.015
At least 0.015

One annuity pays 5 at the end of each year for 40 years another annuity pays 6 at the end of each year for 20
years. The present values of the two annuities are equal at an effective rate of interest i. Find i.

Topic 3 Examples

[2]

TVM: Investment Valuation

3.6

Kathryn deposits 100 into an account at the beginning of each 4-year period for 40 years. The account credits
interest at an effective annual interest rate of i. The accumulated amount in the account at the end of 40
years is X, which is 5 times the accumulated amount in the account at the end of 20 years. Calculate X.
(A)
(B)
(C)
(D)
(E)

4,695
5,070
5,445
5,820
6,195

Topic 3 Examples

[3]

TVM: Investment Valuation

3.7

You have decided to invest in Bond X, an n-year bond with semi-annual coupons and the following
characteristics:
Par value is 1,000

The ratio of the semi-annual coupon rate to the desired semi-annual yield rate, is 1.03125

The present value of the redemption value is 381.50

Given = 0.5889, what is the price of bond X?

(A)
(B)
(C)
(D)
(E)

3.8

9.50%
9.75%
10.00%
10.25%
10.50%

Bill buys a 10-year 1,000 par value 6% bond with semi-annual coupons. The price assumes a nominal yield of
6%, compounded semi-annually. As Bill receives each coupon payment, he immediately puts the money into
an account earning interest at an annual effective rate of i.
At the end of 10 years, immediately after Bill receives the final coupon payment and the redemption value of
the bond, Bill has earned an annual effective yield of 7% on his investment in the bond. Calculate i.
(A)
(B)
(C)
(D)
(E)

9.50%
9.75%
10.00%
10.25%
10.50%

Topic 3 Examples

[4]

TVM: Investment Valuation

3.9

A $1,000 par value 10-year 8% bond has semi-annual coupons. The redemption value equals the par value.
The bond is purchased at a premium to yield 6% convertible semi-annually. What is the amount for
amortization of the premium in the tenth coupon?
(A)
(B)
(C)
(D)
(E)

Less than $7.20

At least $7.20, but less than $7.25
At least $7.25, but less than $7.30
At least $7.30, but less than $7.35
$7.35 or more

3.10 A 10-year bond with par value of $1,000 is purchased to yield 8% convertible semi-annually. Par value equals
to redemption value. The interest-paid portion of the first semi-annual coupon is $44.50. At what nominal
rate of interest convertible semi-annually are the coupons paid?
(A)
(B)
(C)
(D)
(E)

Less than 7.75%

At least 7.75%, but less than 8.50%
At least 8.50%, but less than 9.25%
At least 9.25%, but less than 10.00%
10.00% or more

Topic 3 Examples

[5]

TVM: Investment Valuation

3.11 A 1,000 bond with semi-annual coupons at (2) = 6% matures at par on October 15, 2020. The bond is
purchased on June 28, 2005 to yield the investor (2) = 7%. What is the purchase price paid by a bond buyer?
(F)
(G)
(H)
(I)
(J)

906
907
908
919
925

3.12 A $1,000 par value bond has 7.5% semi-annual coupons and matures on July 1, 2017 at $1,050. Find the actual
selling price of this bond on November 15, 2013 and the price that would be quoted in a financial newspaper
on the same date, based on a nominal annual yield rate of 5.80% compounded semi-annually. Use the actual
number of days for the calculations.

Topic 3 Examples

[6]

TVM: Investment Valuation

3.13 A 10-year callable bond pays semi-annual coupons at a rate of 6% per year. The bond is callable after 5 years
at 102. The bond is priced to yield 7% compounded semi-annually. Determine the price of the callable bond.

3.14 A 10-year callable bond pays semi-annual coupons at a rate of 6% per year. The bond is callable after 5 years
at 102. The bond is priced to yield 5% compounded semi-annually. Determine the price of the callable bond.

3.15 A 1,000 par value bond pays annual coupons of 80. The bond is redeemable at par in 30 years, but is callable
any time from the end of the 10th year at 1,050. Based on her desired yield rate, an investor calculates the
following potential purchase prices, :
Assuming the bond is called at the end of 10th year, = 957
Assuming the bond is held until maturity, = 897
The investor buys the bond at the highest price that guarantees she will receive at least her desired yield rate
regardless of when the bond is called. The investor holds the bond for 20 years, after which time the bond is
called. Calculate the annual yield rate the investor earns.
(A)
(B)
(C)
(D)
(E)

8.56%
9.00%
9.24%
9.53%
9.99%

Topic 3 Examples

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TVM: Investment Valuation

3.16 A companys stock is currently selling for 28.50. Its next dividend, payable one year from now, is expected to
be 0.50 per share. Analysts forecast a long-run dividend growth rate of 7.5% for the company. Tomorrow the
long-run dividend growth rate estimate changes to 7%. Calculate the new stock price that would result in the
same yield rate as the previous days price of 28.50.
(A)
(B)
(C)
(D)
(E)

22.20
23.80
25.90
28.00
28.50

3.17 Common stock X pays a dividend of 50 at the end of the first year, with each subsequent annual dividend
being 5% greater than the preceding one. John purchases the stock at a theoretical price to earn an expected
annual effective yield of 10%. Immediately after receiving the 10th dividend, John sells the stock for a price P.
His annual effective yield over the 10-year period was 8%. Calculate P.
(A)
(B)
(C)
(D)
(E)

1,275
1,435
1,630
2,435
2,715

Topic 3 Examples

[8]

TVM: Investment Valuation

3.18 A common stock is purchased on January 1, 1992. It is expected to pay a dividend of 15 per share at the end
of each year through December 31, 2001. Starting in 2002 dividends are expected to increase K% per year
indefinitely, K% < 8%. The theoretical price to yield an annual effective rate of 8% is 200.90. Calculate K.
(A)
(B)
(C)
(D)
(E)

0.86
1.00
1.14
1.28
1.42

Topic 3 Examples

[9]

TVM: Investment Valuation