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Chapter 4: Q6DQ. (page 279)
If, as an investor, you had a choice of daily, monthly, or quarterly compounding, which would you choose? Why?
An investor with a choice of daily, monthly or quarterly compounding would choose daily compounding because this will result in the maximum returns for the investor.
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Question: Determine the amount of money in a savings account at the end of 10 years, given an initial deposit of $5,500 and a 12 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly.
Exodus Limousine Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 50 years. Compute the current price of the bonds if the percent yield to maturity is
a. 5 percent.
b. 15 percent.
Cal Lury owes $10,000 now. A lender will carry the debt for five more years at 10 percent interest. That is, in this particular case, the amount owed will go up by10 percent per year for five years. The lender then will require that Cal pay off the loan over the next 12 years at 11 percent interest. What will his annual payment be?
Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum as part of its production process, is examining a plastics firm to add to its operations. Before the acquisition, the normal expected outcomes for the firm were as follows:
Outcomes (\( millions) Probability
Recession .............................. \)20 0.30
Normal economy ................... 40 0.40
Strong economy .................... 60 0.30
After the acquisition, the expected outcomes for the firm would be:
Outcomes (\( millions) Probability
Recession .............................. \) 10 0.3
Normal economy ................... 40 0.4
Strong economy .................... 80 0.3
a. Compute the expected value, standard deviation, and coefficient of variation before the acquisition.
b. After the acquisition, these values are as follows:
Expected value .............................................. 43.0 (\( millions)
Standard deviation ........................................ 27.2 (\) millions)
Coefficient of variation ................................... 0.633
Comment on whether this acquisition appears desirable to you.
c. Do you think the firm鈥檚 stock price is likely to go up as a result of this acquisition?
d. If the firm were interested in reducing its risk exposure, which of the following three industries would you advise it to consider for an acquisition?
Briefly comment on your answer.
(1) Chemical company
(2) Oil company
(3) Computer company
Question: You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.
a. What single payment could be made at the beginning of the first year to achieve this objective?
b. What amount could you pay at the end of each year annually for 10 years to achieve this same objective?
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