The company treasurer has to make a $5 Million payment on lawsuit in seven years.    The company lost the lawsuit and the lawsuit has various repercussions for the company.  The in house attorney has stated that the company needs to place the funds in a separate account.    The treasurer has struck a deal with the company's brokerage group. If the company places funds in the account, the brokerage will invest the funds in an instrument that guarantees the company a 3% annual compounded rate.  The treasurer asks you to tell him how much money he needs to invest with the brokerage today so that after seven years the account will have the $5 Million in it.

 

You are a stockbroker.  You client wired $500,000 into her account five years ago. Today, five years later, your client asks you what annual return has she been earning on this brokerage account. The client has taken out no money and added no money to the account.  The account has a $750,000 value today.   The account has been invested in stocks and bonds and the broker has made all the investments and has made a few trades per year.  Question one: what compounded annual return has the client earned?   Does this seem like a reasonable return? (second part no exact answer).

 

Problem 3.

 

You (stockbroker) bought Google stock for a client on the IPO date nine years ago today at the $85 IPO price. (Thus, the client has had the stock in her account for nine years).   Today, the stock trades for $910 per share.  What annual return has the investor earned from holding Google stock in his account.  Here, we assume the stock has not paid any dividends.    Part 2: would your client be satisfied with this investment.

Your friend realizes you have been taking a finance course.   He inherited $100,000 from his great aunt.  He has uses for $75,000 of the funds.  However, he plans on placing $25,000 in a savings account.  One bank quoted him a 2.00% rate compounded quarterly and another bank quoted him a 1.975% rate compounded daily.

 

He has heard the term: effective annual interest rate (page 146 textbook).  He asks you to compute the effective interest rate for these two choices and then tell him which one to choose?

 

A particular investments generates the following cash flows: $5 Million end of year one; $5 Million end of year two; $5 Million end of year three; $7 Million end of year four; and $10 Million end of year five.  (see figure 6.4 on page 131 for an example).

 

What is the future value of this investment if the investor earns 9% per year on all funds invested.