ADMS 3530 Review Session - Notes and Examples Ch.4: TVM PV & FV: SINGLE CASH FLOWS Future Value: FV = PV × (1 + r)n
Present Value: PV = Future Value (1 + r)n PV & FV: MULTIPLE CASH FLOWS Example 1: Multiple Cash Flows In two years from today, the following cash flows will have a future value of $3032.32: $200 today, $Y at the end of one year, and $2,400 at the end of two years. The annual interest rate is 4%. What is Y? A) $330.00 B) $400.00 C) $416.00 D) $432.64 E) $167.55 PERPETUITIES & ANNUITIES Ordinary (regular) Annuity & Ordinary Perpetuity – Cash flows start at end of first time period Perpetuity Due & Annuity Due – Cash Flows start immediately PV Perpetuity (ordinary) = C r PV ...view middle of the document...
25% compounded semi-annually. What will the remaining principal of the loan be at the end of the 5-year term? A) $185,780. B) $196,670. C) $245,450. D) $288,480. E) $400,000
Ch.5 BONDS Terminology Par Value Maturity Date Coupons Discount Rate Also referred to as market interest rate ,or the current interest rate that the market is demanding of similar securities Also known as its yield to maturity. * Do not mix-up COUPON RATE and MARKET INTEREST RATE They are usually different. If they are the same, (i.e. coupon rate = market interest rate), then bond will sell at par value or $1000) Valuation of Bonds Current Price = PV bond payments = PV (Coupons) + PV (Face Value)
3 TYPES OF BOND PROBLEMS: 1. Pricing Problems: 2. Return Problems: 3. Combination Problems First asked to find a bond price at a point in time and then calculate a return if you hold it to maturity or another point in time. Example 5: Bonds You bought a bond with a 7% annual coupon rate at its par value of $1,000 three years ago. The bond had an original maturity of 10 years. Today, the yield to maturity of the bond has increased to 8% annually. The bond pays coupons semi-annually. Assume coupons are not reinvested. a) What is the current yield of the bond today? A) B) C) D) E) 8.0% 7.39% 7.09% 8.39% 5.54%
5B. A government bond carries a 6% coupon rate, pays semi-annual coupons, and has a $1,000 face value. If you purchase it today at $1,015 and expect to sell it 4 years from now at $1,040, what would be your annual rate of return if the coupons are reinvested at 4% APR semi-annually compounded? A) B) C) D) 3.1654% 6.3309% 6.9579% 27.8314%
F) CHAPTER 6 – STOCKS 3 Types of Market Valuation Models Dividend Yield Model Dividend Yield (DY) = annual dividend payment -> DY = DIV1 current stock price P0 Expected Return Model Expected return = r = DIV yield + Price yield r = DIV1 + (P1 – P0) P0 P0 Dividend Discount Model (DDM) a return or valuation model which states that a share price is equal to the present value of all future dividends (i.e. we don’t have to know P1 or Ph!) General model: P0 = DIV1 1 + r)1 + DIV 2 (1 + r)2 + DIV3 ..... (1 + r)3 DIVh (1 + r)h + Ph (1 + r)h
No Growth Dividend model: P0 = DIV1 / r (Simple perpetuity formula from ch.3)
Constant Growth Dividend model: P0 = DIV1 or P0 = DIV0 (1 + g) r–g r-g (Note: This model only works when r is greater than g! Example 6: Stocks Given that XYZ Inc. is projecting a dividend growth of 25% annually over the next 3 years, 18% in the fourth year and 8% annually thereafter, what is the projected dividend for next year based upon an expected 15% return on the stock and a current share price of $60? A) B) C) D) E) $2.00 $2.38 $2.65 $2.98 $1.18
Ch.7 NPV & Other Investment Criteria Capital Budgeting - the...