TUTORIAL 7 – Discounted Cash Flow Valuation I

How much would you pay for a security that pays you $500 every 4 months for the next 10 years if you require a return of 8% per year compounded monthly?

Answer: The Coupon Rate is a generally fixed and is known as the stated rate of a bond that determines the periodic interest payments. As stated in the textbook, the annual coupon dividen by the face value is called the coupon rate of the bond. The YTM rate of return anticipated on the bond if it is held until the maturity Date. YTM is considered a long-term bond yield expressed as an annual rate.

What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested?

A person deposited $500 in a savings account that pays 5% annual interest that is compounded yearly. At the end of 10 years, how much money will be in the savings account? (Bluman, A. G. 2005, page 230).

10. An investment of $1,000 today will grow to $1,100 in one year. What is the continuously compounded rate of return?

Coupon rate is fixed and determines what the bonds coupon will be. The required return is what investor actually demands on the issue and it will fluctuate through time.

The coupon rate is the annual coupon divided by the face value of a bond. This differs from YTM because this shows us the percent rate that the coupon will have. It also is a more fixed rate, unlike the YTM, which increases the bond’s value. The Yield to Maturity Rate is the rate required on a bond. This helps to determine the value of a bond at a particular point in time.

The bonds can be issues with fixed interest or variable rate interest, each of which has its advantages and there disadvantages.

2. If you had a payment that was due you in 5 years for $50,000 and you could earn a 5% rate of return, how much

(b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power.

Propaganda has existed for all recorded human history. World War I was the first time that government-organized propaganda was used after the start of war. German military officials attributed propaganda as one of the reasons they lost the war, with even Adolf Hitler saying that propaganda had lowered the morale of Germany. World War II saw an increase in the use of propaganda because countries had adopted Britain’s use of it to sway citizens and soldiers to hold particular views. Once the United States declared war on Japan, the media requested that the government support anti-Japan and anti-German propaganda to convince the American people of the cruel nature of their enemies.

The semi-annual compounded interest rate is 5.2% (a six-month discount rate of 5.2/2 = 2.6%). (15 points)

5. P = $40({1 – [1/(1 + .03)]26 } / .03) + $1,000[1 / (1 + .03)26]

First we need to get the present value of the annuity for the 1,500 semiannual PMTs at year 14

The price of the bond with the little coupon will be most affected by changes in interest rates as the price of the great coupon bond. For a small coupon bond, the cash flows are weighted much more towards the maturity due to small interest payments dates. The great coupon bond has high interest