Problem 1 (20 Points)
A bond is maturing in 7 years and paying annual coupons of 5%
If the annual required rate of return is 4%, compute:
1. The PV of the bonds;
2. The duration of the bond;
3. The modified duration (volatility);
4. Interpret your result in question 3.
Problem 2 (20 Points)
You have the following bond maturing in 4 years:
Face Value = 1.000$;
Semiannual dividends = 35$;
Annual Interest rate= 5%
1. Compute the PV of the cash flows?
2. What will happen to the bond price if the interest rate decreases to 6%?
3. What will be the price if the annual interest is 4%?
Problem 3 (30 Points)
Valuation of companies can be done by forecasting a series of cash flows and then estimating a horizon value.
Your firm projects net cash flow in years 1 through 5 as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
100 Million $
120 Million $
135 Million $
140 Million $
147 Million $
Assume that the company is expecting a growth rate of 6% starting year 5 and a discount rate of 12%; compute the PV of the company?
Show the details of all your calculations.
Problem 4 (30 Points)
Compute the pay back, discounted pay back, NPV and IRR of the following projects;
Assume a discount rate of 10%
C0
C1
C2
C3
Project A
-2000
500
500
5000
Project B
-2000
500
1800
0
Project C
-2000
1800
500
0
