Exam 7: Time Value of Money Basics and Applications

Five years ago Rogue Construction Inc.issued 20-year maturity fixed-rate bonds at par with a 10% coupon rate.Today those same bonds carry a 14% yield to maturity.Which of the following statements about this bond issue could be true?

Preferred stockholders are the residual claimants of the firm.

Congratulations you have just won the tuition lottery! The lottery pays out four beginning-of-the-year cash flows of $50,000 each with the first cash flow today and the remaining cash flows to follow at the start of years 2,3,and 4.Since the lottery is managed by the Fergetaboutit University system you are considering their offer of a lump sum of $160,000 today.If after considering all of he relevant economic factors,you conclude it is reasonable to use a 12% interest rate to compare these two offers.Which offer should you take and why?

Michael received a professional baseball contract paying $7,000,000 for 5 years,Bert received a two-year contract for $16,000,000 per year.For purposes of calculations,treat these contracts as ordinary annuities.What are the present values of each contract if we assume a discount rate of 6%? It is not clear that the higher present value is the preferred contract in this situation.What other factors might you consider when determining which contract has greater value?

Which has a greater present value,a future value of $300,000 received in year 6,or an end-of-the-year annuity (first cash flow exactly one year from today)of $75,000 that lasts for four years if the relevant interest rate is 0%?

You own a contract that promises an annuity cash flow of $100 beginning-of-the-year cash flows for each of the next three years (note: the first cash flow is today).At an interest rate of 10%,what is the future value of this contract exactly three years from today?

Most bonds issued in the United States have ________ coupon payments and ________ face values.

You own a contract that promises an annuity cash flow of $100 year-end cash flows for each of the next three years (note: the first cash flow is exactly one year from today).At an interest rate of 10%,what is the present value of this contract?

Given a discount rate of 0%,which of the following has the greatest present value? ONE,a series of 10 equal annual end-of-the cash flows of $100 each,TWO,just like ONE except the first 5 cash flows are only $50 but the last 5 cash flows are $150,or THREE,just like ONE except the 10 $100 cash flows are at the beginning of the period.

You own a contract that promises an annuity cash flow of $100 beginning-of-the-year cash flows for each of the next three years (note: the first cash flow is today).At an interest rate of 10%,what is the present value of this contract?

The ________ is used to determine the annual or semi-annual interest cash flow for a bond whereas the ________ is the rate used to determine the price of the bond.

Flyover Airlines Inc.issued 20-year,8% per annum semi-annual coupon bonds at their face value of $1,000.Immediately after issue a major disaster befell the airline and the yield to maturity on their bonds rose to 15%.per annum.What is the new price of the firm's bonds?

Your university is running a special offer on tuition.This year's tuition cost is $18,000.Next year's tuition cost is scheduled to be $19,080.The university offers to discount next year's tuition at a rate of 6% if you agree to pay both year's tuition in full today.How much is the total tuition bill today if you take the offer?

Consider the equation for present value.If you wished to increase the present value of a future amount by changing only one variable,which of the following actions should you take?

Peabody Books Inc.wishes to borrow $182,000 today for the purchase of publishing materials.They have an agreement with their commercial banker that they can borrow money at an annual rate of 4.75%.How much will the firm owe if they repay the loan in exactly one year?

Bueno Media preferred stock shares pay a $4 annual dividend and sell for $57.14 per share.What is the current required rate of return for their shares?

If a bond sells for less than its par value then the yield to maturity is greater than the coupon rate.

Just as a yield to maturity can change on a day-to-day basis,so can a preferred stock share's dividend yield.

To increase the future value of a present cash flow,you could increase the interest rate.

Which choice has a greater present value if we assume a required rate of return of 10%? 1: A lump sum cash flow today of $248.69,2: $100 cash flows occurring one,two,and three years from today,or 3: a single cash flow of $331 three years from today.