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Present Value and Bond Valuation

Assignment Overview

This assignment is in a different direction than your Module 1 Case in that it is mostly computational in nature. Before starting this assignment, work through some of the examples in the background readings to make sure you understand all of the steps involved in future value and present value, including use of present value formulas to compute the value of a bond.

 

Case Assignment

Please download the Case 2 Template . You will type your answers into this document. Save the document with your last name and submit to the dropbox. Note that you will get partial credit if you show your work even if the answers are incorrect.

1. Compute the future value for the following:

a. $2,000 after being invested for two years in a savings account with 3% interest rate

b. $5,000 after being invested for ten years in a savings account with a 1% interest rate

c. $3,500 after being invested for nine years in a savings account with an 11% interest rate

2. Compute the present value for the following:

a. $3,000 to be paid in one year with a 9% discount rate

b. $3,000 to be paid in three years with a 9% discount rate

c. $4,000 to be paid in ten years with a 5% discount rate

3. Compute the present value for the following:

a. An investment that will pay you $1,000 in one year, another $1,000 in two years, and a third payment of $1,000 in three years (e.g., three payments of $1,000 to be paid once a year for three years). The discount rate is 4%.

b. The same three $1,000 payments as in part a) above, but with a 6% discount rate

c. An investment that will pay you $2,000 in one year, another $1,500 in two years, and a third payment of $3,000 in three years. The discount rate is 4%.

4. Compute the value of the following bonds assuming a 3% discount rate (required rate of return):

a. A zero-coupon bond that pays $1,000 in five years

b. A bond that pays $1,000 in five years, with five annual coupon payments of $20 each

c. What is the coupon rate if coupon payments are $20 per year? At what discount rate would the value of the bond be “at par” (e.g., be worth $1,000?). Explain your reasoning.

5. This part of the assignment is purely conceptual with no computations required. Explain the following with references to the required readings:

a. What is likely to happen to interest rates if the rate of inflation suddenly increases?

b. Suppose there are two bonds each with coupon payments of $50. The first bond pays $1,000 in five years, and the other one pays $1,000 in ten years. If interest rates increased, would the value of the bonds increase or decrease? Which of the two bonds would have their value change more after the increase in interest rates? Explain your reasoning.

 Answer the assignment questions directly.

· Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.

· For computational problems, make sure to show your work and explain your steps.

Part 2

Virtual Stock Exchange Project

Module 2 SLP Assignment

· Make 3 stock purchases and provide information about the purchases

Please download the Module 2 SLP template . You will type your answer into this Excel workbook. When finished with the SLP assignment, please save the document with your last name and submit to the dropbox.

1. Purchase 4: Assume you are a very risk averse investor (you don’t like risk). Buy at least $10,000 worth of a company’s stock that is appropriate given your risk preference.

2. Purchase 5: Assume you are a very risk loving investor (you LOVE risk). Buy at least $10,000 worth of a company’s stock that is appropriate given your risk preference.

3. Purchase 6: Assume you are an investor willing to accept average market risk (the Beta of the stock should be around 1). Buy at least $10,000 worth of a company’s stock that is appropriate given your risk preference.

You are free to make additional purchases, but you only need to explain the reasoning behind your required purchases 4 through 6.

4. You will need to include the following information for each stock in this workbook:

· Company Name

· Ticker Symbol

· Reason for Buying

· Current Price

· Previous Close Price

· 52-week High

· 52-week Low

· Beta

· Market Cap

· P/E Ratio

SLP Assignment Expectations

· Answer the assignment questions directly.

· Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.

· For computational problems, make sure to show your work and explain your steps.