FINANCE-When responding to “Why/Explain”

QUESTION

Note: When
responding to “Why/Explain” you should give a meaningful answer that would
convince a skeptic. Show your work for quantitative questions!

P2
You are currently 30 years old and plan on retiring
at 65 of age. You have been called to
the personnel department to look at your retirement planning for the
future. You plan to deposit $200 a month
(the first deposit will occur at the end of this month) until retirement. Interest rates are expected to be 6 percent a
year compounded monthly. The employee from personnel reminds you that if your
career takes off, your salary will be increasing and you can afford to increase
your deposits. You begin to think about
this and you plan to keep the deposits the same ($200 per month) for the first
two years. From that point to
retirement, your monthly deposit will be allowed to increase by 0.2% per month.
When you retire, the balance in your retirement fund will be transferred to low
risk, low interest RIFT that will allow you to make monthly withdrawals of
$1,340 every month with the first withdrawal occurring at the end of the first
retirement month. The interest rate on
the RIFT is 4.0% per year (annual). You
expect to live until you are 90 years of age. The use of a time line is highly
recommended.
a.
How much will be left in the retirement
fund for your kids inheritance when you die at age 90? Note: interest rate calculations contain a minimum of 9 decimal
places! If you round to less, marks for
the question are rounded to 0. (25 marks)
Instructions:
Construct a step by step process to solve this problem. In each step include
the formula you are using and a description of why you are using that
particular formula. Label and show the value for each variable in the formula. A
diagram would be valuable! (Hint)
Example I: You
deposit $500 into an account that pays 3 percent compounded monthly. How much will be in the account at the end of
3 years?
Step 1. Cash
flow characteristics – single cash flow today and we need to calculate the
future value.
Step 2. Interest
rate – the APR is given as 3 percent compounded monthly.
We can use.0/msohtmlclip1/01/clip_image002.png”> or
.0/msohtmlclip1/01/clip_image004.png”>
Step 3.
Calculating the value in the account at the end of 3 years.
.0/msohtmlclip1/01/clip_image006.png”>
At the end of 3
years there will be $547.03 in the account.
Remember to show
your work and do not round. Interest
rate calculations
Example II: The future value of a growing annuity.
The future value
of a growing annuity is the present value of the growing annuity multiplied by
the interest factor for the future value.
Present
value Future value factor
.0/msohtmlclip1/01/clip_image008.png”>

b. You
retired at 65 and you are enjoying your retirement. You are on your way to meet with your family
on your 75th birthday when space debris from a CIA spy satellite
falls from the sky and you instantaneously meet your demise. How much will be left in the retirement fund
for your kids and spouse? (9 marks)

P6-3
You bought a bond with face value of $1,000 and 7% coupon
rate (paid semi-annually) for $900. After 6 months you received one coupon
payment and then sold the bond for the same price. What effective rate of
return did you earn on this investment?

P6-5
Is the yield to maturity (YTM) of a bond the same as its
expected return? Explain briefly!

P7 (8 marks, 2 each)
A bond with an unknown face value and a coupon rate of 10%
(paid annually) matures in 10 years from now. The required return (YTM) is 5%.

i)
Is the bond sold at premium or at discount? Explain!
ii)
If the face value of the bond is $1000, what is the
current market price of the bond?
iii)
What is the current yield of the bond in part ii)?
iv)
Suppose, interest rates and the required return for the
bond in part ii) change, so that the market price of this bond is now $980.
What is the new required return/yield to maturity of this bond? Did interest
rates go up or down?

P8-1
You just bought a 5-year Treasury bond with a 4 year term, a face value
of $1,000 and a coupon rate of 2.5% in the open market at a quoted price of 94.3.
The bond pays semi-annual coupons.
i)
Calculate the yield to maturity for the bond.
(2 marks)
ii)
What is the current yield for the bond in
part i)? (2 marks)
iii)
Suppose you observe a 7-year Treasury bond
with a 6 year term, a face value of $1,000 and a coupon rate of 2.5%. Is its
quoted price higher or lower compared to the quoted price of the 5-year bond?
Explain briefly! (2 marks)
iv)
Two years ago you also bought a 4.4% coupon bond (semi-annual coupons) at$945. The bond currently has 4 years left to
maturity. If you sell the bond today for$1,005 after receiving four coupons, what would be the quoted and the
effective annual return on your bond investment be? (4 marks)
v)
What can you say about the maturity of the
bond in part iv)? (1 mark)
Now assume that you bought a 5-year bond exactly
identical to the 5-year bond from above but with an unknown face value. What
can you say about the yield to maturity of this bond? Explain briefly! (3 marks

MUST USE GIVEN FORMULAS
SHEET

.0/msohtmlclip1/01/clip_image010.png”> .0/msohtmlclip1/01/clip_image012.png”> .0/msohtmlclip1/01/clip_image014.png”>

.0/msohtmlclip1/01/clip_image016.png”> .0/msohtmlclip1/01/clip_image018.png”>
.0/msohtmlclip1/01/clip_image020.png”>
.0/msohtmlclip1/01/clip_image022.png”>
.0/msohtmlclip1/01/clip_image024.png”>
.0/msohtmlclip1/01/clip_image026.png”>

.0/msohtmlclip1/01/clip_image028.png”>

.0/msohtmlclip1/01/clip_image030.png”>
.0/msohtmlclip1/01/clip_image032.png”>
.0/msohtmlclip1/01/clip_image034.png”>
.0/msohtmlclip1/01/clip_image036.png”>

ANSWER:

REQUEST HELP FROM A TUTOR