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Corporate Finance

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1 You have a savings account in which you leave the funds for one year without adding or withdrawing from the account. What would you rather have: a daily compounded rate of 0.040%, a weekly compounded rate of 0.325%, a monthly compounded rate of 1.15%, a quarterly compounded rate of 4.00%, a semi-annually compounded rate of 9%, or an annually compounded rate of 16%? What is the EAR of a daily compounded rate of 0.040% What is the EAR of a weekly compounded rate of 0.325% What is the EAR of a monthly compounded rate of 1.15% What is the EAR of a quarterly compounded rate of 4.00% What is the EAR of a semiannually compounded rate of 9% What is the EAR of a annually compounded rate of 16% What periodic rate would you rather have for your savings account? 2 What is the effective annual rate of a mortgage rate that is advertised at 8.25% (APR) over the next twenty years and paid with semi-annual payments? 3 Sam Hinds, the dentist is going to remodel the dental reception area and two new workstations. The cost of the equipment for the project is $16,000, and the purchase will be financed with a 9% loan over six years. What will Sam have to pay for this equipment if the loan calls for semiannual payments (2 per year) and weekly payments (52 per year)? Compare the annual cash outflow of the two payments. Why does the weekly payment plan have less total cash outflow each year? What will Sam have to pay for this equipment if the loan calls for semiannual payments? What will Sam have to pay for this equipment if the loan calls for weekly payments? Why does the weekly payment plan have less total outflow each year? 4 Cooley Landscaping needs to borrow $28,000 for a new front-end dirt loader. The bank is willing to loan the money at 9% interest for the next 7 years with annual, semiannual, quarterly, or monthly payments. What are the different payments that Cooley Landscaping could choose for these different payment plans? 9% interest for the next 7 years annual payments ? 9% interest for the next 7 years semiannual payments? 9% interest for the next 7 years quarterly payments? 9% interest for the next 7 years monthly payments? 5 Denise has her heart et on being a millionaire. What payment does Denise need to make at the end of each 6 months over the coming 43 years at 9% APR to reach her retirement goal of 1.1 million? What semi-annually payment does Denise need to make to reach her retirement goal? 6 Price the bonds from the following table with annual coupon payments. Par Value Coupon Rate Years to Maturity YTM Price 1000 11 15 11 ? 5000 6 15 5 ? 5000 9 10 10 ? 5000 7 10 7 ? 7 What is the yield of the following bonds if interest is paid annually? Par Value Coupon Rate Years to Maturity YTM Price 5000 10% 30 ? 5500 1000 8% 25 ? 700 1000 7% 5 ? 1000 5000 6% 30 ? 3110 8 What is the yield of the following bonds if interest is paid quarterly? Par Value Coupon Rate Years to Maturity YTM Price 5000 10% 15 ? 5000 1000 8% 10 ? 1230 1000 12% 25 ? 1400 5000 5% 25 ? 2450 9 What is the yield of the following bonds if interest is paid monthly? Par Value Coupon Rate Years to Maturity YTM Price 5000 8% 10 ? 3530 5000 9% 10 ? 4390 1000 11% 30 ? 1090 5000 12% 10 ? 5900 10 Par Value Coupon Rate Years to Maturity YTM Price Coupon Frequency 5000 ? 15 9% 4178.39 monthly 1000 ? 5 11% 886.94 semiannual 1000 ? 5 5% 1173.18 annual 5000 ? 20 6% 7900.46 Quarterly