Time Value of Money You are ready to buy a house, and you have $20,000 for a down payment and closing costs. Closing costs are estimated to be 4% of the loan value. You have an annual salary of $36,000, and the bank is willing to allow your monthly mortgage payment to be equal to 28% of your monthly income. The interest rate on the loan is 6% per year with monthly compounding (.5% per month) for a 30-year fixed rate loan. How much money will the bank loan you? How much can you offer for the house? Bond Valuation Problem How is the value of a bond determined? What is the value of a 10-year, $1,000 par value bond with a 10 percent annual coupon it its required rate of return is 10 percent? What would be the value of the bond described in part 1 if, just after it had been issued the expected inflation rate rose by 3 percent points, causing investors to require a 13 percent return? Would we now have a discount or a premium bond? What would happen to the bonds value if inflation fell, and rd declined to 7 percent? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13 percent, or if it remained at 7 percent? Inflation has remained low for the past three years, but you have come to the conclusion that the trend is ending, and inflation will increase significantly over the next 18 months. Assume you have reached this conclusion prior to other investors reaching the same conclusion. What adjustments should you make to your bond portfolio considering your conclusions? Stock Valuation Problem Assume that Abiproffy has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7%, and that the market risk premium is 5%. What is the required rate of return on the firms stock? Assume that Abiproffy is a constant growth company whose last dividend (Do, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate. What is the firms current stock price? (Hint: use the answer from a to answer this question).