In Need Of Help With Finance Homework Part 2

Discussion in 'Trading' started by TheShooter, Sep 10, 2002.

  1. Here are the three problems I am having most trouble with this week...

    Problem 1:

    Assume that AT&T's pension fund managers are considering two alternative securities as investments: (1) Security Z (for zero intermediate cash flows), which costs $422.41 today, pays nothing during its 10-year life, and then pays $1,000 after 10 years or (2) Security B, which has a cost today of $1,000 and which pays $80 at the end of each of the next 9 years and then $1,080 at the end of Year 10

    a. Assume that the interest rate AT&T's pension fund managers can earn on the fund's money falls to 6% immediately after the securities are purchased and is expected to remain at that level for the next 10 years. What would the price of each security change to, what would the fund's profit be on each security, and what would be the percentage profit (profit divided by cost) for each security?

    b. Assuming that the cash flows for each security had to be reinvested at the new 6 percent market interest rate, (1) what would be the value attributable to each security at the end of 10 years and (2) what "actual, after-the-fact" rate of return would the fund have earned on each security? (Hint: The "actual" rate of return is found as the interest rate that causes the PV of the compounded Year 10 amount to equal the original cost of the security.)

    c. Now assume all the facts as given in parts a and b except assume that the interest rate rose to 12 percent rather than fell to 6 percent. What would happen to the profit figures as developed in part a and to the "actual" rates of return as determined in part b? Explain the results.
  2. Problem 2:

    Assume that you inherited some money. A friend of yours is working as an unpaid intern at a local brokerage firm, and her boss is selling some securities that call for four payments, $50 at the end of each of the next 3 years, plus a payment of $1,050 at the end of Year 4. Your friend says she can get you some of these securities at a cost of $900 each. Your money is now invested in a bank that pays an 8 percent nominal (quoted) interest rate but with quarterly compounding. You regard the securities as being just as safe and as liquid, as your bank deposit, so your required effective annual rate of return on the securities is the same as that on your bank deposit. You must calculate the value of the securities to decide whether they are a good investment. What is their present value to you?
  3. Problem 3:

    Assume that your aunt sold her house on December 31 and that she took a mortgage in the amount of $10,000 as a part of the payment. The mortgage has a quoted (or nominal) interest rate of 10 percent, but it calls for payments every 6 months, beginning on June 30, and the mortgage is to be amortized over 10 years. Now, 1 year later, your aunt must inform the IRS and the person who bought the house of the interest that was included in the two payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.) To the closest dollar, what is the total amount of interest that was paid during the first year?
  4. Dustin


    I get chills remembering that class. I took it about a year ago and can't answer any of your questions...but somehow got an A-.
  5. smokey_mcPaat

    smokey_mcPaat Guest

    yup, reading this stuff makes me glad the 'ol business econ major days are behind me and now i can follow my passion- trading- but on the flip side, i do miss the good times, cheap beer and the easy and cute honies from my college 4 years of my life- (ps- no need for a girlfriend in school- had one for 1 3/4 years- wouldn't do it again- play the field brother- have fun!!!)
  6. nkhoi


  7. def

    def Sponsor

    What ever happened to earning your grade? You might as well consider dropping out if you don't want to learn how to think on your own.

    What is the name of your class - ENRON or WCOM 101?
  8. Babak


    I agree with def on this one. Just be glad I'm not your dad/uncle or you'd be getting an ass whooping for trolling messageboards trying to get others to do your work.
  9. ddefina


    Back in 92', when I took the CPA exam, you had to do this stuff by hand. If you're going into business, or want to purchase a business/rental, it is good to know this info.
  10. To all the smart asses,

    Listen up you elitist hacks. I am posting these damn problems here because I want to learn how they are done. You can only look at a text book so long; after about 3 hours of nothing "clicking" it was more than appropriate to seek out another source, the knowledgable people of this site.

    Do you all actually think that simply getting the answers to these problems is somehow going to get me ahead of my peers? If I just wanted the stupid answers I'd get them out of the back of the book. What I need, however, is to understand how to formulate the answers to problem's like these in case they ever come up on a quiz or test. If being humble enough to admit I can't do that on my own is a crime, then lock my stupid ass up.

    Again, all I am basically seeking is tutoring. If you see my posts as anything other than that then simply choose not to post. What I need is help, not bullshit rhetoric.
    #10     Sep 10, 2002