FINA 6305 Managerial Finance

Homework 2

Section 1: TVM basics:

1.Suppose a State of Texas bond will pay $2,000 ten years from now. If the going interest rate on these 10-year bonds is 0.5%, how much is the bond worth today?

2.Suppose you have $1,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 1.0% annual interest, compounded annually. How much will you have when the CD matures?

3.Suppose you have $1,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 1.0% annual interest, compounded quarterly. How much will you have when the CD matures?

(Hint: To incorporate the compounding effect, you need to convert the annual interest rate into the quarterly interest rate, and convert years into quarters to get correct answer).

4.Suppose you have $1,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 1.0% annual interest, compounded monthly. How much will you have when the CD matures?

(Hint: To incorporate the compounding effect, you need to convert the annual interest rate into the monthly interest rate, and convert years into months to get correct answer).

5.Suppose you have $1,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 1.0% annual interest, compounded daily. How much will you have when the CD matures?

(Hint: To incorporate the compounding effect, you need to convert the annual interest rate into the daily interest rate, and convert years into days to get correct answer).

6.Suppose the U.S. Treasury offers to sell you a bond for $900.00. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

Section 2: Loan Amortization

1.Construct an amortization schedule for the $300,000 loan with a 2.2% interest rate compounded monthly. The loan will be paid back in 15 years making monthly payments.

You need to calculate the principal payment and interest payment respectively of each month.

Hint: Please refer to the excel file of "Loan Amortization "posted in Unit 4 "Lecture".Specifically, you need to modify the model from "yearly" payment to "monthly" mortgage payment.15 years *12 = 180 months.You should demonstrate 180 principal payments and interest payments for each month.

2.Construct an amortization schedule for the $300,000 loan with a 2.7% interest rate compounded

monthly. The loan will be paid back in 30 years making monthly payments.

You need to calculate the principal payment and interest payment respectively of each month.

Hint: Please refer the excel file of "Loan Amortization "posted in Unit 4 "Lecture".Specifically, you need to modify the model from "yearly" payment to "monthly" mortgage payment.

30 years *12 = 360 months.You should demonstrate 360 principal payments and interest payments for each month.