Week 2 – Why is the concept of time value of money important

Task 1 Deadline: Thursday, 10:00 p.m. EST. 

Why is the concept of time value of money important in the corporate context? Justify your answer. A complete post includes an explanation supported by examples and a minimum of 2 research sources. Your post must be substantive and demonstrate insight gained from the course material. A substantial post accomplishes one or more of the following:

1. discusses the application of time value of money in the corporate setting

2. offers additional research or examples, in support of the original answer

3. describes implications of the time value of money concept for capital project financing

4. compares and contrasts management practices in relation to corporate funds

 [Your initial post should be at least  450+ words and in APA format (including Times New Roman with font size 12 and double spaced). Post the actual body of your paper in the discussion thread then attach a Word version of the paper for APA review]

 

Task 2 Deadline: Saturday, 10:00 p.m. EST. 

Assume that you are nearing graduation of your MBA program and have applied for a job with a local bank. As part of the bank’s evaluation process, you have been asked to take an examination that covers several financial analysis techniques. The first section of the test addresses time value of money analysis. See how you would do by answering the following questions.

A customer of the bank, Raj Kami, wants to deposit $100,000 in a savings account that pays a nominal rate of 8%.

a. If the bank compounds interest annually, how much will the customer have in his account 3 years from now?

b. What would the balance be in 3 years from now if the bank used quarterly compounding rather than annual compounding?

c. If Raj Kami deposited the $100,000 in 4 equal payments of $25,000 each at the end of years 1, 2, 3, and 4. How much would he have in the savings account at the end of year 4, based on 8% annual compounding?

d. Raj Kami wants to know how long it will take his sum of money to double if the growth rate per year is 8%

e. Raj Kami wants to buy a car, and a local bank will lend him $20,000. The loan would be fully amortized over 5 years (60 months), and the nominal interest rate would be 12%, with interest paid monthly. What is the monthly loan payment? What is the loan’s effective (or equivalent) rate EFF?

f. What is the present value of $100,000 to be received in 4 years if the appropriate interest rate is 5%?

g. Jackson Corporation’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%. The bonds have a yield to maturity of 10%. What is the current market price of these bonds?

h. Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 10 years, have a face value of $1,000, and a yield to maturity of 9%. What is the price of the bonds?

i. Wilson Wonders’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $900. What is their yield to maturity?

j. What is the present value of a perpetuity that pays $1,000 per year if the appropriate interest rate is 5%?

Explanation & Answer

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