Problem #1

a.
Find
the present and future values of the following cash flows:

The interest rate is 10% compounded quarterly.(12 points)

b.
Suppose
that you borrow $450,000 for a mortgage that is amortized over 30 years with
monthly payments.The interest rate is
fixed at 5% per year for the term of the loan.
How much of the second payment is interest, and how much is
principal?(13 points)Note:
You will have to find the amount of the monthly payment and do an
amortization schedule for two periods to answer this question.On the other hand, if you can calculate the
balance at the end of one period, the amortization schedule is not necessary.
(13 points)

Problem #2

Suppose that you make an investment of $100
and generate cash flows of $50, $40, $40, and $15.

a.
If the
required rate of return is 10%, what is the present value of this stream of
cash flows? (10 points

b.
Given
the cash flows, what is the rate of return earned in each period? (10 points)

c.
If the
present value is greater than zero, and the rate of return is greater than what
is required, should the firm make this investment?State this in terms of the objective of the
firm. (5 points)

Problem #3

Complete the following problems on bond
valuation:

a.
A bond
has a maturity value of $1000, six years to maturity and a coupon rate of 7%
where interest is paid semi-annually.If
the market rate of interest is 8%, determine the current price of the bond. (10
points)

b.
Say
that a bond has a maturity value of $1000, five years to maturity, and a coupon
rate of 4.5% paid annually.If the bond
was purchased for $1120, what return will you earn if the bond is held to
maturity?How is this methodology
different from Problem #2, part (b)?(10
points)

c.
Suppose
you bought the bond for the price in part (a) and then sold the bond for $1150
at the end of two years.What return did
you earn during the two years (i.e., holding period return)?(5 points)

Problem #4

A bond has a face value of $1000, a coupon
rate of 5% (paid semi-annually) and a time to maturity of 10 years.The bond is convertible to 50 shares of
common stock.

a.
If the
market rate of interest is 4.75%, find the straight bond value for this
security.(8 points)

b.
If the
current market price per share is $22.50, find the conversion value for the
bond. (8 points)

c.
Determine
the intrinsic value for this bond.(3
points)

d.
If
there is a premium attached that is equal to $5, what is the market price of
the bond?(2 points)

e.
Describe
the difference between a callable and a putable bond.(4 points)

Bonus:Find the
present value of a stream of cash flows where the payment is at the end of
every third year and this process lasts forever.The interest rate per year is 5%.(5 points)