Essay about Fin 439 Case 92

1006 Words Jun 28th, 2013 5 Pages
QUESTIONS
1. Assume that you are given a set of cash flows on a time line and asked to find their present value. How would you choose the discount rate to apply to these cash flows?

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2. Consider a one-year, $18,000 CD.
a. What is its value at maturity if it pays 8.4 percent (annual) interest?
b. Compute the future value if the CD pays 3.2 percent; if it pays 16.8 percent. Overall, what do these results indicate about the relation between level of interest and future value? c. The First National Bank of San Francisco offers CDs with an 8.4 percent nominal (stated) interest rate but compounded semiannually. What is the effective annual rate on such a
CD? What is the value of the CD at the end of the year? Explain
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6. Assume now that the payments are made at the beginning of each period. Repeat the analysis in Question 5 excluding section e. Explain the impact this has on present or future values.
7. Now consider the schedule of payments from Table 1.
a. What is the value of this payment stream at the end of Year 6 if the payments are invested at 8.4 percent annually?
b. What payment today (Year 0) would be needed to accumulate the needed $35,000?
(Assume that the payments for Years 1 through 5 remain the same as part a.)
8. Consider San Francisco Savings Bank, which pays 8.4 percent interest compounded continuously.
a. What is the effective annual rate under these terms?
b. What is the future value of a $18,000 lump sum after six years?
c. What is the future value of a six-year ordinary annuity with payments of $3,000 each?
Explain the difference in ending values.
d. Explain how the value changes if the payments are made at the beginning rather than the end of the year.
9. The clients are also considering borrowing the $35,000 for their daughter’s first year of college and repaying the loan over a four-year period. Assuming that they can borrow the funds at a 10.2 percent interest rate, what amount of interest and principal will be repaid at the end of each year?
10. The clients may decide to send their daughter to a state university costing $13,500 each year for four years of college, starting in

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