Question 2

A business borrows today $10 million. The loan is paid back in equal annual payments over 4 years, starting next year. Assuming 10.0% interest rate, calculate:

a. The annual payment

b. Interest charged in the first year and second year.

Question 3

a. Price a zero-coupon US treasury, half a year (6 months) to maturity and 8.0% yield to maturity.

b. Price a US Treasury with 6% coupon rate, 22 years to maturity and 8.0% yield to maturity.

c. Price the US Treasury in section b, 150 days into the 181 days coupon period (bond now has 22 years less 150 days to maturity). Report the dirty price, accrued interest and clean price.

Question 4

An investor saves for retirement $400 every month over the next 45 years. The money is invested in a stock portfolio and is expected to earn an average 10% per year. When he retires, he believes he will live 30 years and he will invest his retirement fund in a conservative bond fund that will earn 5.0% per year. During the retirement years, the investor plans to withdraw his life saving in equal monthly withdrawals, exhausting the retirement fund at the end of 30 years.

Calculate the investor 45 years accumulated retirement fund.

Calculate the 30 years of monthly retirement withdrawals that will exhaust his retirement fund at the end.

Question 5

The Gladriel Inc. had recently announced $10 earnings per share and the continuation of 15% return on equity which is expected to continue forever. The stock discount rate is 12%.

a. Assuming an 80.0% payout ratio that will continue indefinitely; calculate the Gladriel stock price.

b. Management considers a worldwide expansion that will require retaining maximum capital, thus paying no dividends for 12 years. After that, in year 13, they will return to 80.0% payout, and will continue that payment level forever. Calculate the stock price if management peruse this strategy.