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BT 321-B: Corporate Finance Problem Set #1 Due: 02/20/2020 Short questions 1. Your bank offers a savings account that pays 1.8% interest, compounded annually. How
BT 321-B: Corporate Finance Problem Set #1 Due: 02/20/2020 Short questions 1. Your bank offers a savings account that pays 1.8% interest, compounded annually. How much will a $500 deposit today be worth at the end of 5 years? 2. Suppose a State of New Mexico bond will pay $1,000 five years from now. If the going interest rate on these 8-year bonds is 4.5%, how much is the bond worth today? (Assuming annual compounding). 3. Cochrane Associate's net sales last year were $500 million. If sales grow at 7.2% per year, how large in millions) will they be 10 years later? 4. You plan to invest some money in a bank account. Please compute the effective annual rates (EAR) for each bank below. Which of the following banks provides you with the highest effective rate of interest? Bank 1; 4.1% with annual compounding Bank 2: 4.0% with monthly compounding Bank 3: 4.0% with annual compounding Bank 4; 4.0% with quarterly compounding, Bank 5; 4.0% with daily (365-day) compounding 5. At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero. (a) Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). (b) Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments). (e) Investment pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). (d) Investment D pays $2,500 at the end of 10 years (just one payment). (e) Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments)
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