What is the value of an investment that pays $8,500 every other year

forever, if the first payment occurs one year from today and the discount rate is 1
compounded daily? What is the value today if the first payment occurs four year
Assume 365 days in a year.

Nature of Cash Flow Perpetuity

Amount of the Cash Flow 8500
Future Value or Present Value ? Future Value

T-1 T0 T1 T2 T3 T4

0 8500 0 8500 0

Present Value of Perpetuity Cash Flow/r

Interest Rate 13% APR Compounded Daily
2 Year interest Rate (1+0.13/365)^2*365-1 0.29687

Present Value of Perpetuity 8500/0.2969 28632.1

PV of Perpetuity at T0 FV for 365 days ₹ 32,606.29

T0 T1 T2 T3 T4
0 0 0 0 8500

Value of Perpetuity 28632.1

Present Value at T0 for 730 Days ₹ 22,077.85

discount rate is 13 percent
occurs four years from today?

Once every 2 years

T5 T6 T7 T8 T9 T10 …..

8500 0 8500 0 8500 0

T5 T6 T7 T8
0 8500 0 8500
One of your customers is delinquent on his accounts payable
balance. You’ve mutually agreed to a repayment schedule of $600 per month. Y
percent per month interest on the overdue balance. If the current balance is $18
will it take for the account to be paid off?

Nature of Cash Flow Ordinary Anuity

Amount of the Cash Flow 600 Monthly
Future Value or Present Value ? Future Value
 of $600 per month. You will charge .9
current balance is $18,400, how long

Lumpsum Rate 0.009

18400 NPER ???
T0 PMT 600
PV 18400
FV
TYPE 0

NPER FUNCTION 36.04612

Friendly’s Quick Loans, Inc., offers you “three for four or I knock on your
door.” This means you get $3 today and repay $4 when you get your paycheck i
else). What’s the effective annual return Friendly’s earns on this lending busines
brave enough to ask, what APR would Friendly’s say you were paying?
knock on your
ou get your paycheck in one week (or
n this lending business? If you were
were paying?
Audrey Sanborn has just arranged to purchase a $450,000 vacation home
in the Bahamas with a 20 percent down payment. The mortgage has a 7.5 perce
interest rate, compounded monthly, and calls for equal monthly payments over t
Her first payment will be due one month from now. However, the mortgage has a
balloon payment, meaning that the balance of the loan must be paid off at the en
were no other transaction costs or finance charges. How much will Audrey’s bal
eight years?
0 vacation home
rtgage has a 7.5 percent stated annual
nthly payments over the next 30 years.
er, the mortgage has an eight-year
st be paid off at the end of year 8. There
much will Audrey’s balloon payment be in
Tom Adams has received a job offer from a large investment bank as a
clerk to an associate banker. His base salary will be $45,000. He will receive his
payment one year from the day he begins to work. In addition, he will get an imm
bonus for joining the company. His salary will grow at 3.5 percent each year. Ea
receive a bonus equal to 10 percent of his salary. Mr. Adams is expected to wor
What is the present value of the offer if the discount rate is 12 percent?
ent bank as a
00. He will receive his first annual salary
ion, he will get an immediate $10,000
percent each year. Each year he will
ms is expected to work for 25 years.
12 percent?
You are serving on a jury. A plaintiff is suing the city for injuries
sustained after a freak street sweeper accident. In the trial, doctors testified that
years before the plaintiff is able to return to work. The jury has already decided i
plaintiff. You are the foreperson of the jury and propose that the jury give the pla
cover the following: (1) The present value of two years’ back pay. The plaintiff’s
the last two years would have been $42,000 and $45,000, respectively. (2) The
five years’ future salary. You assume the salary will be $49,000 per year. (3) $15
suffering. (4) $25,000 for court costs. Assume that the salary payments are equa
the end of each month. If the interest rate you choose is a 9 percent EAR, what
settlement? If you were the plaintiff, would you like to see a higher or lower inter
 , doctors testified that it will be five
has already decided in favor of the
at the jury give the plaintiff an award to
ck pay. The plaintiff’s annual salary for
respectively. (2) The present value of
9,000 per year. (3) $150,000 for pain and
ary payments are equal amounts paid at
9 percent EAR, what is the size of the
a higher or lower interest rate?
Pipe India owns an oil pipeline which will generate Rs 12 crore of cash inco
It has a very long life with negligible operating costs.
The volume of oil shipped will however, decline with The volume of oil shipp
The required rate of return is 12 percent for the company.
If the pipeline is used forever, what is its present value ?
If the pipeline is scrapped after 25 years, what is the present value of its cas
12 crore of cash income in the coming year. time and hence. Cash flows will decline by

he volume of oil shipped will however, decline with time and hence. Cash flows will dec

resent value of its cash flows ?

h flows will decline by 3 percent per year.

. Cash flows will decline by 3 percent per year.

 You have just joined the investment banking firm of Dewey, and Cheat- Em, Hollow.
They have offered you two different salary arrangements. You can have $75,000 per ye
along with a $30,000 signing bonus today. If the interest rate is 10 percent-compounde

Nature of Cash Flow Ordinary Annuity

No of Periods 24
Interest Rate 10% APR
Future Value or Present Value? Future Values
Solve For Present Value
Present Value Framework
Plan A Plan B
Salary ₹ 135,442.84 Salary ₹ 99,324.75
Bonus 30000 Today

Total ₹ 135,442.84 ₹ 129,324.75

d Cheat- Em, Hollow.
n have $75,000 per year for the next two years,You can have $55,000 per year for the next two
0 percent-compounded monthly, which do you prefer?

Future Value Framework

Plan A Plan B
₹ 165,293.22 ₹ 121,215.03
₹ 36,611.73 Monthly Compounding
₹ 36,300.00 Annual Compounding
₹ 165,293.22 ₹ 157,826.76

₹ 135,442.84 ₹ 129,324.75
per year for the next two years

onthly Compounding
nnual Compounding
 Great Lakes issued 10 year bonds with a face value of 1000
The bonds carry a coupon rate of 11% payable half yearly

Face Value 1000 t10 LUMPSUM

Coupon Rate 11% Annual APR
Coupon Payment 55 Ordinary Annuity
How many Coupons 20

Fair Value of Bond PV of Ordinary Annuity + PV value of Lumpsum ₹ 1,000.00

The discount rate is 11% , For bonds the market interst rate is used as discount

After 1 year what will be the fair value of this bond? ₹ 1,000.00

After 2 year what will be the fair value of this bond? ₹ 1,112.34
Assume that the market rate changed to 9%
Remaining Coupons 16 AMORTIZATION
New discount rate 9% NEGATIVE FASHION TOWARDS
THE FACE VALUE
After 2 year what will be the fair value of this bond? ₹ 1,102.23
Assume that the market rate will remain the same as 2 year
 MARKET RATE OF 13%

PREMIUM BONDS ₹ 902.32 DISCOUNT BOND

FAIR VALUE > FACE VALUE FAIR VALUE< FACE VALUE
COUPON RATE > MAKRET RATE COUPON RATE < MARKET RATE
BOND PRICES MOVES INVERSELY WITH MARKET RATE
AMMORTIZATION POSITVE