Seminar one:

Questions:

11. You are quoted an interest rate of 6% on an investment of $10 million. What is
the value of your investment after four years if interest is compounded?
a. Annually?
b. Monthly? or
c. Continuously?

12. What is the PV of $100 received in:

a. Year 10 (at a discount rate of 1%)?
b. Year 10 (at a discount rate of 13%)?
c. Year 15 (at a discount rate of 25%)?
d. Each of years 1 through 3 (at a discount rate of 12%)?

13. a. If the one-year discount factor is .905, what is the one-year interest rate?
b. If the two-year interest rate is 10.5%, what is the two-year discount factor?
c. Given these one- and two-year discount factors, calculate the two-year annuity
factor.
d. If the PV of $10 a year for three years is $24.65, what is the three-year annuity
factor?
e. From your answers to (c) and (d), calculate the three-year discount factor.

20. Siegfried Basset is 65 years of age and has a life expectancy of 12 more years.
He wishes to invest $20,000 in an annuity that will make a level payment at the end
of each year until his death. If the interest rate is 8%, what income can Mr. Basset
expect to receive each year?

33. The annually compounded discount rate is 5.5%. You are asked to calculate the
present value of a 12-year annuity with payments of $50,000 per year.
Calculate PV for each of the following cases.
a. The annuity payments arrive at one-year intervals. The first payment arrives one
year from now.
b. The first payment arrives in six months. Following payments arrive at one-year
intervals (i.e., at 18 months, 30 months, etc.).
Seminar 2:

11. True or false? Explain.

a. Longer-maturity bonds necessarily have longer durations.
b. The longer a bond’s duration, the lower its volatility.
c. Other things equal, the lower the bond coupon, the higher its volatility.
d. If interest rates rise, bond durations rise also.

14. The two-year interest rate is 10% and the expected annual inflation rate is 5%.

a. What is the expected real interest rate?

b. If the expected rate of inflation suddenly rises to 7%, what does Fisher’s theory
say about how the real interest rate will change? What about the nominal rate?

15. A 10-year German government bond (bund) has a face value of €100 and a
coupon rate of 5% paid annually. Assume that the interest rate (in euros) is equal to
6% per year. What is the bond’s PV?

16. A 10-year U.S. Treasury bond with a face value of $10,000 pays a coupon of
5.5% (2.75% of face value every six months). The semiannually compounded
interest rate is 5.2% (a six month discount rate of 5.2/2 2.6%).

a. What is the present value of the bond?

b. Generate a graph or table showing how the bond’s present value changes for
semiannually
compounded interest rates between 1% and 15%.

23. The formula for the duration of a perpetual bond that makes an equal payment
each year in perpetuity is (1 yield)/yield. If each bond
yields 5%, which has the longer duration—a perpetual bond or a 15-year zero-
coupon bond? What if the yield is 10%?
Seminar 3

5. Company Z’s earnings and dividends per share are expected to grow indefinitely
by 5% a year. If next year’s dividend is $10 and the market capitalization rate is 8%,
what is the current stock price?

7. If company Z (see Problem 5) were to distribute all its earnings, it could maintain a
level dividend stream of $15 a share. How much is the market actually paying per
share for growth opportunities?

16. Consider the following three stocks:

Stock A is expected to provide a dividend of $10 a share forever.

Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is

expected to be 4% a year forever.

Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is

expected to be 20% a year for five years (i.e., until year 6) and zero thereafter.

If the market capitalization rate for each stock is 10%, which stock is the most
valuable?
What if the capitalization rate is 7%?

17. Pharmecology is about to pay a dividend of $1.35 per share.

It’s a mature company, but future EPS and dividends are expected to grow with
inflation, which is forecasted at 2.75% per year.

a. What is Pharmecology’s current stock price? The nominal cost of capital is 9.5%.
b. Redo part (a) using forecasted real dividends and a real discount rate.
Seminar 4:
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Seminar 5
Seminar 6:
Seminar 7:
Seminar 8: