FIN 400 Assignment #2

Instructions

It is recommended that the calculations are done in Excel.

For short answer questions, a brief reply is suffice as long as the question is fully answered.

For numerical problems, please present your answers in a style that conforms to textbook/lecture examples.

100 points total

Chapters 5 and 6

(10 points) Suppose you need $2,000 two years later to buy a new computer. Lets say you can invest your money for the next two years at 3% per year, how much money should you set aside now in order to pay for the purchase?

(20 points) In 2014, Coca-Cola Enterprises was planning to build a new bottling plant in the United States, and it needed to borrow about a quarter of a billion dollars for 20 years. It did so by selling zero-coupon bonds, each of which simply promised to pay the holder $1,000 at the end of 20 years. The market interest rate was 3%. How much would you have been prepared to pay for one of the companys bonds?

(10 points) New Savings Bank pays 3% interest on its deposits. If you deposit $1,000 in the bank and leave it there, approximately how long will it take to double your money? Use Rule 72.

(10 points) Your investment advisor is promising to double your money in 8 years. Basically, he said that for every $1 you invest with him, he can turn that into $2 eight years later. What is the rate of return on this investment? Use Rule 72 to solve this problem.

(20 points) Investments in the stock market have increased at an average compound rate of about 10 percent per year since 1926.

If you invested $1,000 in the stock market 50 years ago, how much would that investment be worth today?

If your investment in 1926 has grown to $1 million, how much did you invest 50 years ago?

(10 points) What is the present value of the following cash-flow stream if the interest rate is 5%?

Year	Cash Flow
1	$200
2	$400
3	$300

(10 points) What is the present value of a 3-year annuity of $100 if the discount rate is 7%?

(10 points) Suppose you decide to put $1,000 every year for the next 5 years at 8% interest, starting today. How much money will you have saved 5 years later?